SEC to Recommend Mutual-Fund Charges Against Franklin ResourcesFeb 9, 2004 | AP Federal regulators are poised to charge a subsidiary of mutual fund giant Franklin Resources Inc. with improper trading practices, further entangling the company in an industry scandal that has shaken investor confidence.
The San Mateo, Calif.-based owner of Franklin Templeton Investments disclosed the looming civil action by the Securities and Exchange Commission in a shareholder filing Monday.
The documents provided scant details, and the company didn't return calls Monday. The filing said Franklin is exploring a possible settlement with the SEC.
Franklin's shares fell 18 cents Monday to close at $56.84 on the New York Stock Exchange.
If the SEC files charges, it will add to Franklin's recent spate of legal headaches brought on by a broad investigation into the mutual fund industry's practices.
Just last week, Massachusetts regulators accused Franklin of fraud, alleging the company allowed a Las Vegas businessman to make $45 million worth of improper mutual fund trades in return for his $10 million investment in a Franklin hedge fund.
Franklin says that unauthorized deal didn't harm other shareholders.
Monday's filing said the SEC's staff is recommending an enforcement action against an unnamed Franklin subsidiary and two senior officers suspected of "frequent trading." This technique, also known as "market timing," involves quick, in-and-out trading that's banned by many mutual funds because the practice skims profits from other shareholders.
The company previously disclosed that its own internal investigation had uncovered questionable trades in the personal 401(k) accounts of a few current and former employees, including a trader and an officer in an unnamed fund. Both the trader and the officer have been placed on administrative leave.
Franklin's latest filing didn't disclose if the SEC probe is targeting the two employees on leave.
Regulators in California, Florida and New York also are investigating Franklin, one of the nation's largest mutual fund firms with customer assets totaling $337 billion through December.
Franklin has pledged to reimburse its mutual fund shareholders for any losses that they may have suffered from trading abuses, hoping the guarantee will reassure its customers.