Franklin: Market Timing Hurt No One

February 18, 2004 ( - Responding to charges filed by regulators in Massachusetts earlier this month, Franklin Resources Inc. says the controversial market-timing trades of a singular investor did not adversely impact the masses.

Furthermore, the San Mateo, California based mutual fund company says that it has rejected at least $3 billion in possible market timing assets in recent years.    This came in a response from the company to Massachusetts Secretary of State William Galvin’s charges filed on February 4 (See  Franklin: SEC Civil Charges Pending ), according to a Dow Jones report.

In the complaint, Galvin accused Franklin resources ofallowing a wealthy client to make short-term trades in Franklin-Templeton funds in return for a $10 million investment in aFranklinhedge fund.The civil fraud suit alleges that formerFranklinsenior vice president William Post, who resigned from the firm in December, struck a deal withLas Vegasinvestor Daniel Calugar that permitted frequent market-timing trades inFranklinstock funds.

Additionally, recent news report swirling about indicate Franklin’s scandal woes may be more widespread than just related to one investor (See Report: Franklin’s Trading Problems Worse than First Thought ).   To this, the nation’s fourth-largest mutual fund company says nonsense.  In the response, Franklin said Calugar made three round-trip exchanges of about $20 million in and out of Franklin Small Mid-Cap in September and October of 2001, resulting in a $700,000 net loss.  

Thus, ultimately, “the fund and its shareholders were not harmed,” the response said .   As evidence, the response went on to detail how Franklin simply had no pricing inefficiencies for Calugar to exploit and pointed to the fact that Calugar’s $20 million investment represented a ” minute fraction” of the fund’s $8 billion in net assets.

To further drive its point home, Franklin said that Calugar’s market-timing investments and his investment in the hedge fund were not linked.   “Franklin made sure that Mr. Calugar understood that the investments were independent of each other,” the response contends, saying that the firm’s willingness to allow the questionable trading in the fundwas based on the fund manger’s assessment that the activity would not have a material effect on the fund setting agreed-upon limits on the trades.   Although, it should be noted, that those limits appear to be in excess of the guidelines outlined in the fund’s prospectus.