BOSTON - Two Franklin Templeton Investments units will pay $5 million to settle a Massachusetts complaint alleging the firm allowed a big hedge fund investor to make inappropriate mutual fund trades.
The announcement comes a month after the investment firm reached a $50 million settlement with federal regulators concerning similar allegations. Monday's agreement was the latest in the industrywide fund trading scandal, which has resulted in several major fund complexes - including Alliance Capital Management and Bank of America Corp. - paying hundreds of millions of dollars to settle improper trading charges.
Under terms of the consent order entered Monday, Franklin Advisers Inc. and Franklin Templeton Alternative Strategies Inc. admitted to allowing what's known as market timing even though the fund's prospectus language prohibited such practices, Secretary of State William Galvin said.
Market timing is a type of rapid, in-and-out trading that is not illegal, but widely restricted by many funds because it skims profits from long-term shareholders.
The settlement is the result of a civil complaint the Massachusetts Securities Division filed in February concerning dealings between Franklin and Las Vegas securities broker Daniel Calugar.
State regulators alleged Calugar moved $45 million in and out of the Franklin Small-Mid Cap Growth Fund. Senior Franklin executives allowed the market timing in exchange for Calugar's $10 million investment into the FT Hedge Fund in September 2001, the complaint alleged.
A spokeswoman for San Mateo, Calif.-based Franklin Templeton said the firm was unable to immediately comment on Monday's settlement but was preparing a statement.
In August, Franklin Advisers agreed to a $50 million settlement with the Securities and Exchange Commission for alleged market timing. Franklin Advisers also agreed to make internal reforms to prevent future violations, including a tightened oversight and reporting system. It neither admitted to nor denied the allegations in the settlement accord.
On Monday, the units' parent company, Franklin Resources Inc., fell 38 cents to close at $54.50 on the New York Stock Exchange.