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Franklin to Settle Trading Probe

Officials say the mutual fund giant admitted to improper trades, but the company denies it.

September 21, 2004|Tom Petruno | Times Staff Writer

California mutual fund giant Franklin Resources Inc. on Monday agreed to pay $5 million to settle Massachusetts regulators' allegations that it abetted improper trading of a Franklin stock fund.

In an unusual twist in the year-old investigation of abusive trading in the fund industry, Massachusetts officials said they scored a victory for investors by obtaining an admission from Franklin that it permitted "market timing" in a fund whose bylaws forbade the practice.

The fund industry has been loath to publicly acknowledge any wrongdoing in the trading scandal, in part because such admissions can be used against the companies in private investor lawsuits seeking damages.

"We feel that serious wrongdoing has to be admitted," said William Galvin, who as Massachusetts' secretary of the commonwealth oversees securities regulation in the state.

San Mateo-based Franklin, however, said in a statement that the firm "did not admit or deny engaging in any wrongdoing," but believed it was "in the best interest of the company and its funds' shareholders to settle this issue now."

The seeming disparity between Galvin's view and Franklin's over the issue of an admission was a matter of legal hair-splitting, some analysts said. Whether the case would aid investors who might seek restitution in private lawsuits was unclear, they said.

Franklin appeared to be admitting to a "finding of fact," which included that it permitted a client to engage in market timing of one of its stock funds -- a point it never disputed, said Geoff Bobroff, a fund industry consultant who heads Bobroff Consulting in Rhode Island.

Franklin and other fund companies generally haven't denied that some investors were allowed to make rapid short-term trades in funds in recent years, with the effect of skimming profits from longer-term investors.

A key question has been whether such trading violated fund bylaws, which could constitute fraud. On that point, many fund firms have argued that they didn't break their own rules.

Most fund companies that have been accused of allowing abusive trading have settled the allegations by paying large fines and restitution, without admitting or denying wrongdoing.

Massachusetts initially sued Franklin in February, alleging that the firm permitted Las Vegas investor Daniel Calugar to engage in market timing in the Franklin Small-Mid Cap Growth fund in 2001, in return for a $10-million investment in a Franklin hedge fund. Calugar wasn't named in the suit.

Franklin in August settled broader market-timing allegations by the Securities and Exchange Commission by agreeing to pay $50 million in restitution to fund investors.

The $5 million the company is paying to settle the Massachusetts case will go to that state's coffers. Galvin said it was "hard to say" whether investors in the Small-Mid Cap Growth fund were harmed by the market-timing trades, but he said "it's the conduct [by Franklin] that has to be penalized."

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