Daniel Calugar was what they call a whale.
He was the biggest of the big fish (OK, whales are mammals) in an open sea where the small fish, as we now know, don’t really matter all that much.
But in the market-timing case of Mr. Calugar and Franklin Resources Inc., a better analogy might employ the use of birds.
Because Calugar and his co-conspirators at the California mutual fund firm might as well have left a trail of breadcrumbs to their alleged illicit trading activity.
Secretary of State William F. Galvin picked up the trail – launching his latest salvo against crooked trading practices in a civil complaint against Franklin Resources on Wednesday.
That their tracks were so easily followed through e-mails and other correspondence suggests how bold the privileged few of fund investing had become – long before this scandal became public.
“The client we are going to allow to time is Dan Calugar of Security Brokerage in Las Vegas,” Franklin sales executive Tom Johnson wrote to a colleague on Aug. 9, 2001. “The same gentleman . . . previously timed us through his own (broker-dealer).”
Just two months earlier, according to another e-mail obtained by Galvin, Johnson had expressed concern that Calugar’s arrangement wouldn’t “pass the smell test.” Another executive, Peter Jones, said “we don’t want timing money.”
But $10 million buys a lot of leeway – particularly when it comes to propping up a hedge fund in desperate need of capital.
With the industry’s own defense mechanisms so woefully nonexistent, Daniel Calugar allegedly had timed Franklin mutual funds from the outside.
Yet when he wanted to up the stakes and take a huge ($45 million) position for market-timing, the path took him inside one of the largest fund firms in America, investigators claim.
On Aug. 14, 2001, Calugar wrote to his contact at Franklin to lay out terms for perhaps the most shocking abuse of mutual fund trading norms to come to light so far.
“(We) will purchase $10 million in the Franklin Templeton Strategic Growth Fund LP, effective Sept. 1,” Calugar wrote to William Post, a Franklin executive who allegedly brokered the deal. “During the balance of 2001, (we) will make purchases of up to $45 million in the Franklin Strategic Small Cap Growth Fund. These positions will be invested using a market timing approach we discussed.”
It’s a tremendous challenge to call this anything other than a bribe.
Calugar, who did not return calls for comment, quite simply bought his way into an otherwise prohibited market-timing arrangement.
“I think it demonstrates how little they cared about their investors,” Galvin says of Franklin Resources. “What’s most disturbing about this case . . . is that here we have the company itself being a beneficiary of this action.”
How important was the $10 million? It represented nearly 60 percent of the entire hedge fund.
When Calugar contemplated pulling out of his commitment to that Franklin Templeton fund in August 2002, a frantic memo circulated by Post contemplated “disaster.”
“Mr. Calugar’s redemption . . . will lower the fund’s total assets to approximately $7.1 million allocated among 14 hedge fund managers,” Post wrote on Aug. 15, 2002. “This creates a significant issue since each underlying hedge fund requires a minimum investment of $1 million.”
Today – after refusing to cooperate with an internal probe – William Post is gone. At least one other employee has been placed on leave, a statement on Franklin’s Web site says, while several fund directors “have retained independent counsel . . . and they will be dealt with appropriately.”
It is so clearly not enough. Because the hints of protest to Calugar’s arrangement – which can be found sprinkled throughout the company e-mails – only serve to reinforce how wrong it was for the trading to have been allowed.
More so than in any other case to date, it shows that greed and privilege in the mutual fund world have spread beyond the individuals, and dangerously infected organizations.
“The company gained benefit out of this (market-timing agreement),” Galvin says. “And for a company to blatantly set a price for selling out its investors – it’s a new low.”
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