Franklin Resources Inc., the nation’s fourth-largest mutual fund company, said Monday that it had suspended three employees after an internal review uncovered potentially improper trading of its fund shares.
The San Mateo, Calif.-based firm, whose funds carry the brand name Franklin Templeton, also said it had been subpoenaed by federal prosecutors investigating trading abuses.
Franklin is the biggest fund company to acknowledge finding instances of so-called market timing trades since the scandal over mutual fund trading practices erupted in early September. Franklin said some of the questionable trades were made inside the company’s 401(k) retirement plan.
The firm said the trades were made by two officers and one trader. It declined to identify the individuals or the specific funds involved but said no portfolio managers or trustees were among them.
Franklin has received subpoenas from federal prosecutors in Northern California and Massachusetts, it said in a federal filing and an online shareholder update.
Spokeswoman Stacey Johnson declined to comment further on the developments.
Analysts said shareholders in the Franklin funds, or in the stock of parent Franklin Resources, should be concerned, but they said there was no evidence of egregious conduct by the company.
“It’s encouraging that there is no indication any portfolio manager or analyst was involved,” said Dan Culloton of fund tracker Morningstar Inc. “What’s not encouraging is that we don’t know who these other people are and whether or not they had any impact on the portfolio.”
Since Sept. 3, when New York Atty. Gen. Eliot Spitzer alleged widespread market timing rapid trading in and out of funds, usually in violation of fund rules and late-trading abuses in the fund business, the Securities and Exchange Commission and various state and federal regulators have launched investigations of their own.
The U.S. attorney’s office for the Northern District of California has convened a grand jury and subpoenaed at least five fund companies, seeking documents linked to fund trading, The Times reported last week.
Culloton said Morningstar, which has urged investors to avoid funds from several other companies implicated in the scandal, was unlikely to recommend ditching Franklin unless evidence surfaced that the firm accepted fee-generating assets from customers in exchange for allowing those clients to profit through market timing, or that fund managers engaged in “insider dealing.”
Roy Weitz, whose Tarzana-based Web site FundAlarm.com has skewered Putnam Investments, Strong Capital Management and some of the other fund firms touched by the trading scandal, said: “Franklin is a good, conservative firm, and they seem to have ferreted out this activity.”
Given Franklin’s respectable investment record and barring new surprises, institutional investors such as pension funds are unlikely to withdraw assets in droves, analysts said.
By contrast, rival Putnam has seen many defections since late October, when the nation’s fifth-biggest fund company was accused of a series of market timing trades by its own portfolio managers.
In general, the Franklin funds have notched “decent” returns, Weitz said, whereas subpar performance by Putnam during the 2000-02 bear market left some institutional investors inclined to give up on that firm.
More than 75% of Franklin’s long-term mutual fund assets were in funds ranked in the top half of their Lipper Inc. peer groups for the one-, three, five and 10-year periods ended Sept. 30, Franklin Resources said in its latest earnings report. The firm is best known for its international, “value”-oriented and fixed-income funds.
Considering that the SEC had indicated that half of the 88 large fund companies it queried in September for trading records acknowledged finding evidence of market timing, industry consultant Geoff Bobroff of East Greenwich, R.I., said, Franklin’s revelations were not surprising.
Bobroff said he believed more details would emerge, perhaps including indications that outside investors had timed Franklin’s funds. He also noted that Franklin had earlier acknowledged getting a subpoena from Spitzer’s office.
Though not necessarily illegal, rapid in-and-out trading of fund shares is estimated to have cost U.S. investors as much as $5 billion a year by driving up transaction costs, and most funds officially discourage the practice.
After-the-bell late trading, in which investors buy fund shares after the stock market’s 4 p.m. close but receive the same day’s closing price rather than the next day’s price, is clearly illegal.