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Investor Files Suit Against Franklin


Feb 13, 2004 | San Jose Mercury News

A San Mateo investor sued Franklin Resources in San Francisco federal court, alleging the firm harmed investors by allowing improper trading in one of its funds in 2001.

The suit, seeking class-action status, is part of the latest fallout from investigations into wrongdoing by several fund companies in the $7 trillion mutual fund industry. Regulators charge that fund companies including Putnam, Janus and Pilgrim Baxter allowed select, wealthy investors to essentially skim profits out of mutual funds in exchange for investing large sums elsewhere within the companies.

Las Vegas investor

The lawsuit filed Wednesday alleges that Franklin allowed a wealthy Las Vegas investor to make rapid in-and-out trades in a Franklin mutual fund, even though the firm's policy was to disallow such ``market timing'' because it adds costs for other investors.

In return for the dispensation, the investor allegedly made a $10 million investment in a hedge fund in another Franklin division.

The suit closely mirrors a fraud complaint filed by Massachusetts regulators earlier this month. The Securities and Exchange Commission may also take action against Franklin, the company recently disclosed.

``The prospectuses say that market timing won't happen,'' said the lawyer who filed the case on behalf of an investor, a Franklin mutual fund investor since 1979. ``That's a fiduciary duty that Franklin has to all its shareholders, to follow its own practices.''

Franklin has responded that the alleged problems were limited and not in violation of fund policies. They also said the arrangement did not harm any investors, and that the executive responsible has left.

Millions in stock

The lawsuit also said that in late 2003 before the revelations of regulatory actions against Franklin the firm's two co-presidents sold millions of dollars in Franklin stock, their first sales in two years.

``During this period where Franklin Resources was representing it was not engaged in any improper activity, both Martin Flanagan and Gregory Johnson were selling millions of dollars in stock,'' said the suit, which seeks compensatory and punitive damages.

Franklin had no immediate comment on the suit Thursday. But in a statement, the company said, ``The stock sales were in the normal course and were completely proper.''

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