Massachusetts securities regulators on Wednesday charged Franklin Resources, the fourth-largest mutual fund firm, with fraud for improper trading, adding one more name to the fast-growing list of managers now engulfed in an industry-wide scandal.
Massachusetts Secretary of the Commonwealth William Galvin, who has been at the forefront of the industry probe, said Franklin allowed a Las Vegas investor to break internal rules in return for promises to put money into Franklin’s hedge funds.
“This case is another example of a mutual fund having one standard for the ordinary investor and an entirely different one for someone able to move millions and millions of dollars through it in market timing trades,” Galvin said in a statement.
A spokeswoman for Franklin did not immediately return calls seeking comment.
Regulators charged Daniel Calugar, president of Las Vegas-based Security Brokerage Inc., invested $10 million in Franklin’s loosely regulated hedge funds and was therefore allowed to hastily buy and sell shares in the Franklin Small-Mid Cap Growth fund. The fund, managed by Edward Jamieson, Michael McCarthy, and Aidan O’Connell returned 37.7 percent last year, according to Morningstar Inc. data.
So-called market timing is not illegal but Templeton, like scores of other fund companies, forbid this kind of trading in their prospectuses because it is considered to hurt long-term investors.
Regulators said they have as evidence to support their charges e-mails that suggest several Franklin employees knew about the deals made with Calugar.
Regulators are demanding that Franklin return the illegal profits they made to shareholders and pay a fine.
Galvin’s office already charged Putnam Investments, the sixth-largest mutual fund company, and Prudential Securities last year and is investigating whether other companies also broke their own rules and selectively offered benefits to certain special clients.
