BOSTON - Federal regulators have found that improper market timing at Franklin Resources Inc. extended beyond the arrangement with a single Las Vegas broker highlighted this week by Massachusetts authorities, a Securities and Exchange Commission official said Thursday.
Franklin of San Mateo, Calif., the No. 4 mutual fund company by assets and now the largest to be charged in the mutual fund scandal, is in settlement talks with the SEC and an agreement is expected to be finalized within weeks, the official said, speaking on condition of anonymity.
In a civil complaint filed Wednesday, Massachusetts securities regulators described an arrangement in which Franklin, which operates the Franklin Templeton brand, allegedly allowed Las Vegas broker Daniel Calugar to market time $45-million in exchange for a $10-million hedge fund investment.
Market timing is not illegal, but Massachusetts authorities contend Franklin committed fraud by turning a blind eye to the practice despite promises to other customers not to tolerate it.
The official declined to provide details of what the SEC has found, but said the SEC's investigation was much broader than Massachusetts Secretary of State William Galvin's.
Franklin had previously disclosed it was being investigated by the SEC, state authorities in California, New York and Massachusetts, and federal prosecutors in California and Massachusetts.
In a message to shareholders posted this month, Franklin said an internal inquiry had uncovered "various instances of frequent trading where we have questions about the propriety of what occurred."
In a statement released Wednesday, Franklin said that it was confident no investors were harmed by the investments described in the Massachusetts complaint, and that it was cooperating with investigators and continuing discussions with the SEC.
A Franklin spokeswoman said Thursday that the company would have no further comment.
The complaint filed Wednesday by the Massachusetts Securities Division alleges top Franklin officials were complicit in the arrangements with Calugar, who had already been accused by the SEC of earning $175-million from improper trading in mutual funds managed by Alliance Capital Management and Massachusetts Financial Services.
Ralph Kessler, a former SEC enforcement attorney now in private practice in New York, said this type of arrangement likely raised particular alarm bells for regulators because it more clearly profited fund companies.
Such arrangements lead "to a dollars and cents benefit which resonates with the public and the commission," Kessler said. "It's not a hypothetical type of advantage which is harder to quantify."
Franklin is the No. 4 fund company in assets behind Fidelity Investments, Vanguard Group and American Funds, according to Financial Research Corp.
MFS okays $350-milliondeal, ousts top executives
BOSTON - The company that invented the mutual fund 80 years ago was formally swept up in the improper fund trading scandal Thursday, as Massachusetts Financial Services agreed to $350-million in settlements that also forced the ouster of two top executives.
The agreement reached with the Securities and Exchange Commission and regulators in New York and New Hampshire also restricts MFS chief executive John Ballen and president and chief investment officer Kevin Parke from certain types of jobs in the fund industry for three years.
Late Thursday, MFS's parent company named Robert J. Manning, previously chief fixed income officer, as MFS's new CEO. In a brief statement, Toronto-based Sun Life Financial also expressed satisfaction with the settlement, which does not include any admission or denial of wrongdoing by the company, Ballen or Parke.
