By Devlin Barrett
The Associated Press

WASHINGTON - The government is conducting a broad sweep of the mutual fund industry, and more charges are likely in the growing scandal in the $7 trillion business, a top enforcement official said Tuesday.

Stephen Cutler, head of the Securities and Exchange Commission's enforcement division, told Congress that the SEC plans to send notifications to some firms this week that investigators intend to file civil charges.

He did not name any of the companies nor did he say how many would receive the legal warnings.

Cutler spoke as the scandal spread to Prudential Securities Inc., with the SEC and Massachusetts securities regulators filing civil charges alleging improper trading against former brokers and branch managers at the company's Boston office.

The regulators alleged that the brokers used several means, including false identities, to disguise rapid in-and-out trading in mutual funds to enrich themselves and the hedge funds whose money they were investing.

The move followed the announcement Monday that Lawrence J. Lasser, the chief executive of Boston-based Putnam Investments, was stepping down following the filing of civil fraud charges against the nation's fifth-largest mutual fund company.

Cutler told a House Financial Services subcommittee that the SEC already had notified one firm regarding possible abuses.

The SEC is seeking information from more than 100 others as it tries to determine how many did not give the proper volume discounts to customers.

Regulators and lawmakers are trying to come to grips with allegations that many large investors or insiders received favorable treatment in the timing of trades and other fund management practices.

The subcommittee is considering legislation to stiffen penalties for fraud in mutual fund management.

Outside the hearing, Cutler described the SEC's work as "a fairly widespread sweep to understand these issues."

New York Attorney General Eliot Spitzer told lawmakers that they should consider doing something to revamp firms' internal compliance departments. "They have utterly betrayed the American public," he said.

Rep. Richard Baker, R-La., the subcommittee chairman, said he was concerned that inaction by Congress could hurt the economy.

Spitzer contended that the problems in the mutual fund industry are so pervasive that it is more than a matter of excising a few "bad apples" from the industry.

"It's beginning to appear that the entire crate is rotten," he said. "The problems are structural, they are systemic."

At a Senate hearing Monday, federal regulators were questioned about their response to alleged trading abuses that siphon money from ordinary investors.

The SEC began a mutual fund investigation in early September, and dozens of firms have been subpoenaed, including Fidelity Investments, Janus Capital Group, Morgan Stanley and Vanguard Group. Several investment companies, including Janus and Bank of America, have pledged to make restitution to mutual fund investors who lost money through alleged improper trading.

The scandal has tarnished the reputation of mutual funds, traditionally viewed as a safe, conservative investment. About 90 million people have money in U.S. stock mutual funds.