Fund Times: Franklin Faces Fraud Charges

Massachusetts Secretary of the Commonwealth William Galvin charged San Mateo, Calif.-based  Franklin Resources (BEN) and William Post, a former Franklin official, with fraud Wednesday. The complaint charges that in 2001, the firm and Post allegedly allowed a wealthy Las Vegas investor to market-time up to $45 million in Franklin mutual funds in exchange for a $10 million "sticky asset" investment in a Franklin hedge fund.

The prospectus for the fund that was market-timed, Franklin Small Cap Growth Fund I (now called  Franklin Small-Mid Cap Growth (FRSGX)), specifically prohibited market-timing, according to the complaint. (Trading abuses such as market-timing and late-trading can dilute long-term shareholders' gains and add to a fund's expenses.)

The complaint asks that Franklin give illegal profits back to fund shareholders and pay an undetermined fine.

Franklin contended that the firm is "committed to working with Massachusetts regulators to resolve this situation in the best interests of our investors."

The firm said the "complaint arises from activity that occurred in 2001 during which time an officer of a company subsidiary proposed an agreement with an investor. This proposal was unauthorized and was rejected by management. This is the same individual who, as the company had disclosed in December, had been placed on administrative leave and has subsequently left the company."

Franklin said it's negotiating with the Securities and Exchange Commission about this and other matters.

MFS Settles with Regulators
Ending months of speculation, MFS settled fast-trading and late-trading allegations Thursday with the SEC and the New York and New Hampshire Attorneys General.

The regulators ordered the firm to pay a total of $225 million to shareholders who were harmed when MFS allowed market-timing in 11 of its mutual funds, despite prospectus language that suggested quick-trading would not be allowed. In addition, the firm agreed to reduce the fees it charges on retail mutual funds by $25 million annually over the next five years.

As part of the settlement, officials also suspended MFS CEO John Ballen and President Kevin Parke from working at an investment company for nine months and six months, respectively, and limited their involvement in the business for up to three years. Ballen and Parke, who had signed off on the fast-trading policies and the prospectus language that regulators found misleading, resigned from their posts at the firm Thursday. Robert Manning, the firm's chief of fixed income, was promoted to president and CEO.

"The alleged wrongdoing at MFS is very serious, in our opinion," said Morningstar fund analyst Laura Pavlenko Lutton. "We are reviewing the evidence presented by the regulators and will issue an investment opinion on MFS in the coming days. In the meantime, we suggest investors stop sending new money to the firm."

Famed Vanguard Value Manager to Retire
Chuck Freeman, 60, will retire as lead manager of $19 billion  Vanguard Windsor (VWNDX) on June 30. He will be succeeded by David Fassnacht, the fund's assistant portfolio manager since early 2001. Meanwhile, 30% of the fund's assets continue to be run by Bernstein Investment Management and Research.

Freeman, who took the fund's reins from investing legend John Neff in December 1995, has built a strong, though at times rocky, record here, said Morningstar fund analyst Paul Herbert. From Jan. 1, 1996, through Dec. 31, 2003, the fund gained an impressive 10.7% per year, outpacing the S&P 500 Index by 1.3 percentage points per year over the same stretch.

"We don't expect a sea change with the appointment of Fassnacht. At 37, he's young to be taking over such a large amount of money, but he's well versed in the Windsor style of investing," Herbert said. In addition to running Windsor, Fassnacht will manage  Vanguard Capital Value , a $400 million sibling of Windsor. He has served as an assistant portfolio manager on that fund since its inception in 2001.

Federated Announces $7.6 Million Restoration Fund
Pittsburgh-based  Federated Investors (FII) announced in a press release Tuesday that it will set up a $7.6 million restoration fund, to be used to counteract the negative effects of abusive trading. This amount was reached by an independent firm providing financial and economic analysis, which was hired by the independent trustees of Federated funds.

The fund family first told shareholders of its management company in late October that it had found evidence of improper trading in its funds, and in late November it further revealed it found about 15 trades that occurred after the 4 p.m. Eastern time deadline.

The independent trustees have not yet determined how to distribute the restoration fund, and no government agency has approved it. However, the firm said about $4.8 million would cover the detrimental impact of frequent trading on the funds and $2 million would cover the effects of late trading. The company also collected about $420,000 in fees from the assets in frequent-trading arrangements, and another $355,000 in interest on these amounts.

The $7.6 million doesn't include fines, penalties, or other payments the firm could end up paying to private lawsuits and state and federal authorities.

Federated also said it has sanctioned an officer who pushed through about $52,000 in fund trades after the 4:00 p.m. deadline and made the officer pay the difference between the correct share prices and the share prices used in processing the orders.

Further, Federated revealed that two portfolio managers frequently traded funds that they managed using the company's 401(k) plan. One portfolio manager had two offsetting trades over a five-month period, with durations of 35 and 76 days in amounts of approximately $600,000. The other had seven offsetting trades in a 21-month period, with durations from nine to 62 days in amounts up to $160,000. These employees are also being "sanctioned," Federated said.

The firm also said it has taken several other remedial steps, including outsourcing its transfer agent function and retaining an independent consultant to audit and review the firm's compliance functions. Federated said it also implemented several changes to its code of ethics for employees' personal trades of Federated funds, and has stepped up its employee training efforts.

Turner Merges Funds into New 'Constellation' Funds
Turner Funds is seeking shareholder approval to merge certain funds into "virtually identical" Constellation funds. Under the proposed reorganization, each Turner fund's assets and liabilities would be transferred to a new Constellation Fund that is being created just for this purpose. Constellation Investment Management Company (CIMCO) would serve as each new fund's investment advisor, and CIMCO, in turn, would hire Turner, Clover Capital Management, and Chartwell Investment Partners as subadvisors responsible for managing the newly organized Constellation Funds. Therefore, according to the SEC filing, there will be no management changes at the funds as a result of this proposed reorganization. In addition, the funds' expenses will remain the same or similar, the filing said.

The following Turner-subadvised funds would take on new names: Turner Financial Services  will become Constellation TIP Financial Services, Turner Healthcare & Biotechnology  will be called Constellation TIP Healthcare & Biotechnology, and Turner Tax Managed U.S. Equity  will now be Constellation TIP Tax Managed. Turner Small Cap Value Opportunities  (currently subadvised by Turner Investment Management, LLC) will become Constellation TIP Small Cap Value Opportunities.

Turner Strategic Value and High Income (TSVIX), a fund of funds that is currently subadvised by Turner, will be renamed Constellation Strategic Value and High Income.

The Clover-subadvised funds would be renamed as follows: Turner Large Cap Value  will be Constellation Clover Large Cap Value,  Turner Core Value  will be called Constellation Clover Core Value,  Turner Small Cap Value  will be renamed Constellation Clover Small Cap Value, and  Turner Core Fixed Income  will now be called Constellation Clover Core Fixed Income.

The following funds are currently subadvised by Turner. However, the firm is proposing that they be instead subadvised by Chartwell. The day-to-day management of the funds will not change, however. According to the filing, Roger Early and Paul Matlack form the team that manages  Turner Ultra Short Duration Fixed Income (TSDOX) and Turner Short Duration Fixed Income , while Early, Matlack, and John McCarthy form the committee that manages Turner High Yield . Early, Matlack, and McCarthy recently became employees of Chartwell, while remaining "dual" employees of Turner for the sole purpose of providing day-to-day management services to these funds. Under the proposed arrangement, Early, Matlack, and McCarthy would terminate their respective employment with Turner, and Chartwell will serve as the subadvisor to these funds. The funds, therefore, will be renamed as follows: Constellation Chartwell Ultra Short Duration Fixed Income, Constellation Chartwell Short Duration Fixed Income, and Constellation Chartwell High Yield.

The date and time of the shareholder proxy vote was not specified in the filing, nor was the date listed that indicated when proposed changes would take place.

ICON Renames Some Funds
ICON Funds has changed the name and objective of its two Europe-stock offerings. ICON North Europe Fund became ICON International Equity  and invests in stocks from everywhere except the United States. ICON South Europe Fund became ICON Europe  and invests in stocks from all over the continent. Denver-based ICON also noted that it launched institutional share classes of ICON Core Equity  , ICON Bond , ICON Covered Call , ICON Equity Income , and ICON Long/Short .

Etc.
 T. Rowe Price Small-Cap Stock  (OTCFX) will close to new investors as of 4:00 p.m. Eastern time Feb. 20. Purchases of shares are permitted for existing investors holding shares directly with T. Rowe Price, and participants in their employers' retirement plans where the fund is an option in the plan, according to an SEC filing.

T. Rowe Price Associates announced that William T. Reynolds, director of the Fixed Income Division, will retire in April. Reynolds is a 22-year veteran of the firm. As part of a planned succession, bond manager and current Assistant Director Mary J. Miller will replace Reynolds as head of the Fixed Income Division, which manages about $55 billion in assets for investors.

The $207 million Burnham Financial Services (BURKX) planned to close to most new investors on Feb. 13, 2004. The Burnham fund family, which also includes the  Burnham Fund (BURHX), also said it would open two new portfolios run by Anton Schutz, who also manages the Financial Services fund. The firm hopes to open the Burnham Financial Industries Fund and the Burnham Long/Short Equity Fund in April.

 FPA Capital  is adding a 2% redemption fee for redemptions within 90 days of purchase, according to a prospectus supplement filed this week. Redemption fees help protect long-term shareholders from the harmful effects of market-timing.

Paul Flynn, a former trader at Canadian Imperial Bank of Commerce  was arrested Tuesday and charged with criminal violations of the New York State business law. The SEC also charged him with civil violations of federal securities laws for his role in allegedly improper mutual fund trading. He faces the charges in connection with CIBC's role in allegedly financing late trading and market-timing trades for hedge funds, including Canary Capital Partners LLC.

At-a-Glance Scandal Coverage
As the mutual fund trading scandal spreads in breadth and depth, it's become more difficult for investors to stay on top of every detail and the latest news. So we've compiled all the pertinent information in one table, offering you a family-by-family index outlining regulators' charges and settlements (if any), fund company statements, our recommendations, and links to more in-depth coverage. Click here to see if your fund family has been implicated and get the latest developments.