Feb. 10–The Securities and Exchange Commission may take action against a unit of Franklin Resources of San Mateo and two unidentified senior officers for allegedly allowing improper trading in itsmutual funds.
The news was disclosed in an SEC filing by the mutual fund company Monday. It comes days after Massachusetts authorities charged the firm with allowing a wealthy Las Vegas investor in 2001 to make mutual fund trades at the expense of ordinary investors.
The firm did so, regulators alleged, to win a $10 million investment from the Las Vegas investor into a new hedge fund benefiting select wealthy investors and Franklin managers.
Now, it appears the SEC is considering bringing similar charges against Franklin, the fourth-largest fund company in the United States.
Franklin did not specify if the SEC’s charges would involve the arrangement with the Las Vegas investor, or a separate one.
Franklin said last week that the trading arrangement was limited to three trades by a single investor — Daniel Calugar of Security Brokerage. The company said the trades were “unauthorized” and had been “rejected by management” when proposed. Franklin also said it was confident no investors were harmed.
In Monday’s filing, Franklin said the arrangement did not violate policies provided to investors in the mutual fund prospectus.
Regulators nationwide are cracking down on mutual fund companies — including Putnam Investments, Invesco and Janus — for allegedly allowed a variety of trading practices that harmed rank-and-file investors in the $7 trillion mutual fund industry.
The most common improper practice is the one discovered at Franklin: market timing. Under such arrangements, officials allow certain investors to make improper, rapid in-and-out trades in mutual funds.
They usually give this special privilege to wealthy investors who are willing to invest large sums of money elsewhere at the fund group, boosting its assets under management — and its management fees.
Market timing typically is not illegal, but often violates the firm’s policies provided to investors and jacks up the fund’s expenses — which are borne by other investors.
The complaint filed by Massachusetts’ Secretary of the Commonwealth alleges that various current or former top executives of Franklin either knew about or approved the arrangement with the Las Vegas investor.
One former executive mentioned in the complaint was the firm’s then-co-president, Charles E. “Chuck” Johnson, son of Franklin’s chairman. Johnson took a leave of absence from the firm in 2002. A sales manager wrote in an e-mail that Calugar had “some how gotten in touch with Chuck Johnson” who had allegedly “agreed to accept” Calugar’s investment.
However, in a letter to the Mercury News, Johnson wrote, “I have never spoken with or otherwise communicated with Daniel Calugar.”
“I never approved or agreed to accept ‘this client’s money’,” the letter continued. “I was totally unaware of any of his business dealings with various individuals at Franklin Templeton,” he added.
Wall Street stock analysts are divided over the impact of the various regulatory actions on Franklin.
Merrill Lynch analyst Guy Moszkowski lowered his rating on the company from buy to neutral, due to the uncertainty of what it might cost Franklin to settle the charges. Merrill Lynch has been an investment banker for Franklin in the past six months.
Others, including Robert Hanson of Standard & Poor’s Equity Group, said the alleged wrongdoing appears to be very limited, involves a very small amount of hedge-fund profit (one analyst estimated no more than $100,000) and only three trades. Also, said Hanson, Franklin’s fund performance has been outstanding lately, unlike that of other mutual funds under investigation. Hanson said he does not personally own Franklin stock.
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