SAN MATEO — Mutual fund giant Franklin Resources, the largest publicly traded U.S. mutual fund manager, said the Securities and Exchange Commission may take action against the company and twounidentified senior employees for alleged improper trading.
Massachusetts regulators last week accused San Mateo-based Franklin of giving a Las Vegas broker trading privileges that weren’t available to all investors. Franklin said Monday in an SEC filing that any loss of client confidence caused by the probe may result in a “significant decline” in assets.
Franklin, co-led by Chief Executives Greg Johnson and Martin Flanagan, is among more than 20 companies under investigation for allegedly allowing trading that may have diluted returns of long- term fund holders. MFS Investment Management and Alliance Capital Management Holding LP have settled with regulators by agreeing to penalties and fee cuts of about $950 million combined.
“This has turned out to be far larger in scope than anybody anticipated at the outset,” said Franklin Morton, senior vice president of Ariel Capital Management in Chicago, which held 3.8 million shares of Franklin at the end of September. Investors are awaiting more information on “the level of the wrongdoing” to assess how much Franklin will be hurt, he said.
Franklin, which oversees more than $335 billion for clients, said it’s in “preliminary” talks with the SEC to reach a settlement. Shares of Franklinwere down 18 cents to $56.84 on the New York Stock Exchange composite trading when the market closed Monday. The stock has declined 5.3 percent during the past two weeks.
Franklin rose to prominence in the mutual fund industry in 1992 when the company bought the Templeton funds from Sir John Templeton for almost $915 million. Templeton made his reputation for being among the first U.S. investors to focus on buying international stocks. These days the Templeton funds are overseen by managers including Mark Mobius.
The Massachusetts Secretary of the Commonwealth, William Galvin, said in his Feb. 4 complaint that Franklin and a former employee let Daniel Calugar of Las Vegas make so-called market-timing trades with $45 million in mutual funds in return for investing $10 million in a Franklin hedge fund.
Franklin last week said the agreement was unauthorized and no shareholders were hurt by Calugar’s trading. William Post, a former employee, was suspended for reasons relating to Calugar’s dealings with the firm. Franklin has suspended two other employees, including an executive for short-term trading in 401(k) retirement plans.
Two analysts who asked not to be identified stressed that Franklin stopped what’s being probed by the SEC on its own two years ago. The analysts don’t think investors will opt to pull money out of the Franklin funds — because they have performed well. But that doesn’t mean analysts are not holding their breath until the scandal blows over.
“It’s obviously not good and not helpful to Franklin,” said Tom Baker, principal at Blue Oak Capital, a Palo Alto-based money manager. “Investors should take time to understand what the allegations are before taking a rifle shot and pulling their money blindly out of the funds.”
Baker said he believes Franklin will “do what’s right to clean things up.” He doesn’t believe Franklin’s reputation will be tarnished in the long run.
But the SEC’s probe involves broader accusations of market timing that go further than the Calugar case, a person familiar with the matter said last week.
In the SEC filing, Franklin said it can’t predict the outcome of the investigations by the SEC and state regulators in Massachusetts, California, New York and Florida.
“The SEC has informed the company that it intends to recommend to the commission that it will authorize an action against a subsidiary of the company and two senior officers relating to the frequent trading issues,” the filing said.
Franklin had been gaining customers who have fled companies that have been sued. The industry’s probe focuses on market-timing trades that take advantage of the fact that mutual funds are priced once a day, while the securities they hold trade almost continuously.
Bloomberg News and Business Writer Tim Simmers contributed to this report.
