Franklin To Resolve SEC ProbeMay 18, 2004 | San Francisco Chronicle Mutual fund giant Franklin Resources Inc. of San Mateo may resolve allegations of improper trading raised by the Securities and Exchange Commission before the end of June, the company disclosed in a financial report filed on Friday.
Franklin is among dozens of mutual fund firms that federal and state authorities have investigated for alleged improper trading. Several firms have already reached settlements with the SEC and other regulators.
In April, Putnam Investments agreed to pay $110 million, split evenly between the SEC and Massachusetts, to settle allegations that it allowed clients and its own fund managers to trade improperly. In March, Bank of America Corp. agreed to pay $375 million to the SEC and New York, while FleetBoston Financial agreed to pay $140 million to the same entities.
Franklin last month said it took a charge of $60 million for the quarter that ended March 31 to cover costs related to the various governmental investigations, proceedings and actions.
The SEC staff informed Franklin that the agency will recommend a civil action against its subsidiary Franklin Advisers Inc. for allegedly allowing favored investors to engage in frequent trading, also known as market timing, the company has previously disclosed.
Market timing gives a handful of privileged clients the opportunity to buy and sell funds more frequently than fund rules allow, thereby permitting them to trade on news events and reap short-term profits. While not illegal, the practice dilutes returns for long-term investors.
Franklin said it believes charges of improper trading are unwarranted.
"Although there can be no assurance, a resolution of such issues may be reached with the SEC staff in the coming quarter," Franklin's filing said. Franklin is also being investigated by state agencies in California, Massachusetts, Florida, New York, West Virginia and Vermont for alleged instances of late trading, market timing and payments to securities dealers who sell fund shares.
The Massachusetts Secretary of State in February filed civil fraud charges against Franklin for an alleged "blatant quid pro quo" that allowed a wealthy Las Vegas investor, Daniel Calugar, to engage in market timing in exchange for investing $10 million in a new Franklin investment fund.
In addition, a range of private lawsuits are pending against Franklin alleging violations of federal securities laws and seeking monetary damages. Many of those suits have been consolidated with more than 240 similar lawsuits against 18 different mutual fund companies.
After conducting an internal investigation, "we have not found any late trading problems, but we have identified various instances of frequent trading, " Franklin wrote in a press release. Franklin wrote that one officer of a company subsidiary had been placed on administrative leave and subsequently resigned. "A few current or former employees" had instances of frequent trading in their personal 401(k) plans, Franklin wrote. One trader and one officer of the funds had been placed on administrative leave and the officer had resigned, it said. None of the individuals were identified.
A Franklin spokeswoman said the firm would not provide information beyond that in the regulatory filing and press release.