SAN MATEO — A Peninsula lawfirm has filed a class-action lawsuit against Franklin Resources and a number of its entities on behalf of holders of Franklin mutual funds.
San Mateo-based Franklin, the nation’s fourth-largest mutual fund company, is being investigated by government officials in the current trading abuse scandal in the U.S. mutual fund industry.
On Monday, Franklin said that the Securities and Exchange Commission intended to recommend charging the company and two unnamed executives over mutual fund trading practices.
The Millbrae lawfirm of Corey, Lazaich, Pliska, deGhetaldi and Nastari filed the lawsuit Wednesday at the United States District Court for the Northern District of Californiain San Francisco.
The lawsuit was brought in behalf of Hillsborough resident Leo K. W. Lum, a Franklin investor and “all those similarly situated.” Lum purchased shares in a Franklin Templeton mutual fund in 1979 and he has continually held those shares to date.
“The victims here are Franklin’s clients,” said Jerry E. Nastari, partner at the Millbrae lawfirm.
“But this case is not only about compensating the victims of Franklin’s wrongful activity. It’s also about addressing the breaches of trust and confidence suffered by the mutual fund clients.
“Franklin’s practices exemplify serious and pervasive problems, which need to be immediately remedied. Investors deserve to have their trust restored.”
Franklin did not return phone calls seeking a response to the lawsuit. Damages would be determined later if the court approves the class action, Nastari said.
Franklin is among more than 20 companies under investigation for allegedly allowing trading that may have diluted returns of long- term fund holders.
In a civil complaint, Massachusetts securities regulators described an arrangement in which Franklin, which operates the Franklin Templeton brand, allegedly allowed Las Vegas broker Daniel Calugar to use market timing practices on $45 million of investments in exchange for a $10 million hedge fund investment. Market timing refers to trades that move quickly in and out of mutual funds. One example of market timing involves taking advantage of foreign market closing times and breaking news to buy shares before they can rise.
Franklin said that the agreement was unauthorized and no shareholders were hurt by Calugar’s trading.
Market timing is not illegal, but Massachusetts authorities contend that Franklin committed fraud by turning a blind eye to the practice despite promises to other customers not to tolerate it. Market-timing can skim profits from long-term investors.
Franklin oversees about $335 billion for clients, and it’s in “preliminary” talks with the SEC to reach a settlement.
