Daniel Calugar was what they call a whale.<\/p>\n
He was the biggest of the big fish (OK, whales are mammals) in an open sea where the small fish, as we now know, don’t really matter all that much.<\/p>\n
But in the market-timing case of Mr. Calugar and Franklin Resources Inc., a better analogy might employ the use of birds.<\/p>\n
Because Calugar and his co-conspirators at the California mutual fund firm might as well have left a trail of breadcrumbs to their alleged illicit trading activity.<\/p>\n
Secretary of State William F. Galvin picked up the trail – launching his latest salvo against crooked trading practices in a civil complaint against Franklin Resources on Wednesday.<\/p>\n
That their tracks were so easily followed through e-mails and other correspondence suggests how bold the privileged few of fund investing had become – long before this scandal became public.<\/p>\n
“The client we are going to allow to time is Dan Calugar of Security Brokerage in Las Vegas,” Franklin sales executive Tom Johnson wrote to a colleague on Aug. 9, 2001. “The same gentleman . . . previously timed us through his own (broker-dealer).”<\/p>\n
Just two months earlier, according to another e-mail obtained by Galvin, Johnson had expressed concern that Calugar’s arrangement wouldn’t “pass the smell test.” Another executive, Peter Jones, said “we don’t want timing money.”<\/p>\n
But $10 million buys a lot of leeway – particularly when it comes to propping up a hedge fund in desperate need of capital.<\/p>\n
With the industry’s own defense mechanisms so woefully nonexistent, Daniel Calugar allegedly had timed Franklin mutual funds from the outside.<\/p>\n
Yet when he wanted to up the stakes and take a huge ($45 million) position for market-timing, the path took him inside one of the largest fund firms in America, investigators claim.<\/p>\n
On Aug. 14, 2001, Calugar wrote to his contact at Franklin to lay out terms for perhaps the most shocking abuse of mutual fund trading norms to come to light so far.<\/p>\n
“(We) will purchase $10 million in the Franklin Templeton Strategic Growth Fund LP, effective Sept. 1,” Calugar wrote to William Post, a Franklin executive who allegedly brokered the deal. “During the balance of 2001, (we) will make purchases of up to $45 million in the Franklin Strategic Small Cap Growth Fund. These positions will be invested using a market timing approach we discussed.”<\/p>\n
It’s a tremendous challenge to call this anything other than a bribe.<\/p>\n
Calugar, who did not return calls for comment, quite simply bought his way into an otherwise prohibited market-timing arrangement.<\/p>\n
“I think it demonstrates how little they cared about their investors,” Galvin says of Franklin Resources. “What’s most disturbing about this case . . . is that here we have the company itself being a beneficiary of this action.”<\/p>\n
How important was the $10 million? It represented nearly 60 percent of the entire hedge fund.<\/p>\n
When Calugar contemplated pulling out of his commitment to that Franklin Templeton fund in August 2002, a frantic memo circulated by Post contemplated “disaster.”<\/p>\n
“Mr. Calugar’s redemption . . . will lower the fund’s total assets to approximately $7.1 million allocated among 14 hedge fund managers,” Post wrote on Aug. 15, 2002. “This creates a significant issue since each underlying hedge fund requires a minimum investment of $1 million.”<\/p>\n
Today – after refusing to cooperate with an internal probe – William Post is gone. At least one other employee has been placed on leave, a statement on Franklin’s Web site says, while several fund directors “have retained independent counsel . . . and they will be dealt with appropriately.”<\/p>\n
It is so clearly not enough. Because the hints of protest to Calugar’s arrangement – which can be found sprinkled throughout the company e-mails – only serve to reinforce how wrong it was for the trading to have been allowed.<\/p>\n
More so than in any other case to date, it shows that greed and privilege in the mutual fund world have spread beyond the individuals, and dangerously infected organizations.<\/p>\n
“The company gained benefit out of this (market-timing agreement),” Galvin says. “And for a company to blatantly set a price for selling out its investors – it’s a new low.”<\/p>\n
Send e-mail to: cosmo@bostonherald.com.<\/p>\n","protected":false},"excerpt":{"rendered":"
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