Massachusetts regulators accused mutual fund giant Franklin Resources of civil fraud Wednesday, saying the firm engaged in a frequent-trading scheme with a wealthy investor.
In the enforcement action, Massachusetts Secretary of State William Galvin alleged that Franklin Resources, the fourth-largest U.S. mutual fund company, allowed Daniel Calugar, president of Las Vegas-based Security Brokerage, to market time $45 million in its mutual funds.
In exchange, Calugar allegedly agreed to invest $10 million in a Franklin hedge fund.
Massachusetts regulators are asking Franklin, which operates as Franklin Templeton Investments, to return illegal profits to fund shareholders and pay a fine.
In December, San Mateo, Calif.-based Franklin said it had placed three employees on administrative leave for market-timing irregularities uncovered by an internal review. It also disclosed that it has received subpoenas and requests for information from the Securities and Exchange Commission, the attorneys general of New York and California, and U.S. Attorneys in California and Massachusetts.
Market timing involves frequent trading to exploit ”stale” prices, typically due to time zone differences. It is legal but might violate fund rules. It can give market timers a profit at the expense of long-term shareholders.
”Our policy is to work closely with regulators to deal swiftly with any issue such as this,” the company said in a statement Wednesday.
The complaint claims that in 2001, William Post, a former senior executive of Franklin Templeton, arranged for Calugar to invest $10 million in a Franklin hedge fund. The deal allegedly was contingent on Calugar being allowed to market time the Franklin Small-Mid Cap Growth fund. No charges were filed against Post.
In its statement, Franklin said that Post’s arrangement with Calugar was unauthorized and rejected by management. It said that Post left the company after he was placed on administrative leave.
In December, the SEC charged Calugar and his company with mutual fund trading irregularities.
