Franklin Resources Inc., the biggest publicly traded US mutual fund manager, said the Securities and Exchange Commission may take action against the company and two unidentified senior employees for alleged improper trading.
Massachusetts regulators last week accused the San Mateo, Calif.-based firm of giving a Las Vegas broker trading privileges that weren’t available to all investors. Franklin said yesterday 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 of Boston 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 Franklin were down 18 cents yesterday to close at $56.84 on the New York Stock Exchange. 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 US investors to focus on buying international stocks. Now the Templeton funds are overseen by managers including Mark Mobius.
Massachusetts Secretary of State William F. 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.
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.
The accusations may jeopardize Franklin’s strong sales. Last year the firm won customers from companies such as Janus Capital Group Inc. and Boston-based Putnam Investments. Franklin attracted a net $4.4 billion to its stock and bond funds in the fourth quarter, according to Financial Research Corp. in Boston. Janus lost $7.3 billion in the same period and Putnam lost $20.1 billion.
High-level executives at Franklin may have known about the Calugar arrangement, according to the Massachusetts lawsuit. In an Aug. 17, 2001, e-mail, Calugar said Post had discussed his investment with Greg Johnson, who at the time was one of four presidents at Franklin. Johnson last month was promoted to co-CEO.
Charles “Chuck” Johnson, Greg’s brother and one of the four presidents at the time, “agreed to accept this client’s money in various funds and a hedge fund,” according to an Aug. 28, 2001, e-mail that Philip Bensen, senior vice president, wrote to Peter Jones, president of Franklin’s fund distribution unit.