Franklin to Settle Trading Charges
The parent of the Franklin and Templeton mutual funds agreed Monday to pay $50 million to settle civil fraud charges that it allowed abusive trading of fund shares, in what may be one of the last major cases of its kind in the 11-month-old industry scandal.
The Securities and Exchange Commission said San Mateo, Calif.-based Franklin Advisers Inc., a unit of the nation’s fourth-largest fund company, let more than 30 favored clients engage in “market timing” of fund shares from 1996 through 2001, contrary to what it told average investors in fund documents.
The case echoes many of the other investigations into improper trading that have rocked the industry since September. But the $50 million is much smaller than the amounts some of Franklin’s rivals have paid to end similar federal and state probes.
Massachusetts Financial Services Inc., for example, paid $225 million in penalties this year. Janus Capital Group Inc. agreed to a $100-million penalty.
And in an unusual move, the SEC lauded Franklin in the settlement order Monday, saying that the firm generally tried to stop market timers even as other fund companies were encouraging the practice in recent years.
“Franklin did take steps to stop market timing and we wanted to recognize that,” said Helane Morrison, administrator of the SEC’s San Francisco office, which led the probe.
She also said the SEC found that abusive conduct “was more extensive” at some of the other firms implicated in the scandal. For example, other fund companies provided market timers with nonpublic information such as portfolio holdings.
Still, Morrison said that Franklin’s actions warranted “serious sanctions.”
Although the settlement ended the SEC’s probe of trading misconduct at Franklin, the agency is continuing to investigate payments the firm has made to brokerages as incentives to sell its funds. The SEC also is looking at other fund companies’ broker relationships.
In a statement Monday, Franklin didn’t admit or deny wrongdoing, but said it agreed to ethics reforms, including hiring a senior staffer to review potential conflicts of interest and an ombudsman to handle any concerns raised by its own employees.
Franklin executives also promised to better protect shareholders in the future.
“These provisions will be incorporated along with other steps we have already taken to address these issues,” said Martin L. Flanagan, co-chief executive of Franklin Resources Inc., parent of the fund advisor.
The $50-million settlement includes $20 million in penalties and $30 million in so-called disgorgement. The entire sum will be paid back to shareholders of Franklin mutual funds who were affected by market-timing trades, the SEC said.
The agency did not name the specific funds involved, but the settlement included a reference to market timing in “two tax-free bond funds.”
The SEC isn’t requiring Franklin to reduce its fund management fees as part of the deal. The SEC hasn’t pursued fee cuts in its settlements, unlike New York Atty. Gen. Eliot Spitzer, who was the first to bring abusive-trading cases against fund firms beginning in September.
In contrast to some of the other high-profile timing cases, no top executives at Franklin will lose their jobs as part of the deal.
That meant Franklin, which manages $351 billion in all, got little more than a wrist slap, some industry critics said.
“That $50 million is a big number, but it’s only money, and that’s what these companies mint,” said Roy Weitz, editor of Tarzana-based FundAlarm.com, an industry watchdog. “If you can get off with no executives fired, you got off pretty easily. It’s sending a message that nobody was responsible, and somebody always is.”
Rapid fund trading known as market timing isn’t illegal, but fund companies typically discourage it, saying it runs up costs shared by all investors in a portfolio. Regulators say fund companies that allowed selective timing may be guilty of fraud.
Franklin failed to disclose that at least three dozen market timers were permitted to freely trade for several months in 2000, despite prospectus language indicating that such timing would be restricted, the SEC said.
After other identified timers were told to stop their activities that September, Franklin allegedly gave “one favored timer” permission to continue making unlimited trades with $75 million in assets for several more months, the SEC said.
Franklin also let one trader engage in the practice at the same time that person invested $10 million in a new hedge fund launched by Franklin, the SEC alleged.
The agency declined to name any individuals involved in the case. Its administrative order accompanying the settlement “seemed to be well-wordsmithed,” said Geoff Bobroff, an industry consultant in East Greenwich, R.I.
In February, Massachusetts’ securities regulator accused Franklin of similar market-timing abuses, and it named names.
Massachusetts claimed that former Franklin sales executive William Post struck a deal with prominent market timer Daniel Calugar, a Los Angeles and Las Vegas resident who ran his own trading firm.
Calugar invested $10 million in a Franklin hedge fund in 2001 in exchange for timing privileges, that complaint alleged. Calugar was sued separately by the SEC over his trading, but neither he nor Post was named as a defendant in the Massachusetts case.
Responding to that complaint in February, Franklin said it violated none of Massachusetts’ laws.
Massachusetts did not join the SEC’s settlement Monday, which “leaves open the question of how Franklin deals with that case,” Bobroff said.
An attorney for Calugar, who will seek to have the SEC’s case against him dismissed at a hearing in Las Vegas on Monday, did not return a call seeking comment on the Franklin deal.
The SEC’s case against Franklin includes some patterns that have become familiar in the industry scandal. For example, the SEC said that a Franklin officer sought to come up with acceptable timing limits after a fund supervisor complained about the trading activity.
With the Franklin settlement, industry analysts say only a handful of fund market-timing cases remain to be resolved with federal and state regulators.
In its statement Monday, Franklin said it was continuing to discuss with regulators ways to resolve their separate investigation of the firm’s revenue-sharing deals with brokers.
The SEC and other state regulators are probing so-called pay-to-play practices in which fund companies have made payments to brokers as an incentive to pitch their funds to investors.
The SEC and California Atty. Gen. Bill Lockyer are jointly investigating Franklin as well as Los Angeles-based American Funds and the Pimco Funds, the bond-management operation of which is based in Newport Beach.
Franklin shares rose 26 cents to $48.51 on the New York Stock Exchange.
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Fund scandal penalties
Franklin Resources agreed Monday to a $50-million settlement in a case alleging market-timing abuses of its funds. Here’s what other major companies have paid, in fines and restitution and in reductions in fund management fees, to resolve market-timing cases.
*--* Fines/ Fund Company restitution fee cuts Alliance Capital $250 million $350 million Bank of America/Fleet Boston $515 million 160 million Franklin Resources $50 million none Janus Capital $100 million $125 million Massachusetts Financial Services $225 million 125 million PEA Capital $18 million none Pilgrim Baxter $90 million $10 million Putnam Investments $110 million * Strong Capital $80 million $35 million
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* Putnam voluntarily said it would reduce fund fees; the reduction wasn’t part of its settlement with regulators
Sources: Bloomberg News, Times research
