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Guilty Plea Entered in Trading Case

Investor Daniel Calugar was accused of fraud for 'market timing' in a Franklin Templeton mutual fund.

January 26, 2006|Walter Hamilton | Times Staff Writer

NEW YORK — Investor Daniel Calugar pleaded guilty Wednesday to a criminal charge of defrauding mutual fund investors, just two weeks after agreeing to pay $153 million to settle civil charges.

In a deal with New York Atty. Gen. Eliot Spitzer, Calugar pleaded guilty to one felony count of violating state securities law through improper trading of a Franklin Templeton mutual fund. He faces as many as four years in prison at his sentencing, scheduled for March 23 in New York State Supreme Court.

Calugar was the 10th person convicted in the 2 1/2 -year-old fund scandal, but could become only the second sentenced to jail time.

"I'm very happy when a guy like Calugar does time," said Mercer Bullard, head of Fund Democracy, an advocacy group for mutual fund shareholders. "Far too infrequently do white-collar criminals pay their dues."

Calugar, of Ponte Vedra Beach, Fla., could not be reached for comment and his attorney did not return a call.

The 52-year-old investor, who worked out of Las Vegas and owned a home in Los Angeles, allegedly reaped $175 million from 2001 to 2003 by trading mutual fund shares after the markets had closed and by engaging in rapid-fire, "market-timing" trades -- practices that raise costs for other fund investors.

His conviction stemmed from a secret deal Calugar cut with an employee of Franklin Resources Inc. of San Mateo, Calif., to rapidly trade shares of its Franklin Small-Mid Cap Growth Fund without paying the required 2% penalty fee, Spitzer said. In return, Calugar agreed to invest $10 million in a separate Franklin-run hedge fund.

Spitzer said the deal defrauded the fund and its other shareholders of more than $1 million in fees, plus undetermined losses stemming from Calugar's trading activity.

Calugar surrendered to authorities and was booked and processed before being handcuffed and transported to New York State Supreme Court, said Marc Violette, a Spitzer spokesman. Judge James Yates released Calugar on his own recognizance pending his sentencing hearing.

Franklin was not charged. In August 2004, the company agreed to pay $50 million to settle civil fraud charges that it allowed abusive trading of its funds. In that settlement, the Securities and Exchange Commission said Franklin generally tried to stop market timers even as competitors encouraged the practice.

In a statement Wednesday, Franklin said Spitzer's action against Calugar "concerned activity that occurred in 2001 and was the subject of a matter that two investment advisor subsidiaries of Franklin Resources ... settled with the SEC and the state of Massachusetts in 2004."

On Jan. 10, Calugar agreed to pay $153 million to the SEC to settle wide-ranging allegations of market timing and late trading. In October, he agreed to pay $72 million to settle a federal class-action lawsuit filed by fund investors.

Spitzer's investigation into the mutual fund industry has resulted in 10 convictions since September 2003, when he announced a settlement with the Canary Capital Partners hedge fund related to illegal trading. His office lost a closely watched case last year, however, when a former Bank of America broker was acquitted of criminal charges.

So far, the only person sentenced to prison in connection with the trading scandals is James Patrick Connelly Jr., a former senior executive at mutual fund company Fred Alger Management.

Judge Yates sentenced Connelly to one to three years in state prison, but said that sentence stemmed from Connelly's alleged tampering of evidence in the case, not the fund trading itself.

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