“Massachusetts regulators charged mutual-fund concern Franklin Resources Inc. with civil fraud, claiming senior executives approved a secret deal with a wealthy Las Vegas investor that enabled him to trade rapidly in one of the company’s funds at the expense of rank-and-file customers,” writes John Hechinger in today’s Wall Street Journal.

“Franklin is the nation’s fourth-largest mutual-fund company, with a storied 57-year history and a roster of money managers that has included some of the best-known stock pickers in the business. It now becomes the largest firm in the industry to be charged in the five-month-old mutual-fund scandal.”

“In e-mails cited by regulators, a Franklin employee and the Las Vegas investor say members of the Johnson family — the West Coast billionaires who control the company — may have known about the trading arrangement.”

“In a civil administrative complaint alleging civil fraud, the Massachusetts Securities Division, overseen by Secretary of the Commonwealth William Galvin, claimed that Daniel G. Calugar, president of Security Brokerage Inc., made an agreement with Franklin in which he invested $10 million in a Franklin Templeton hedge fund. Hedge funds are lightly regulated investment vehicles that cater to wealthy individuals and institutions.”

“In return for his investment, Mr. Calugar was allowed to rapidly trade $45 million in Franklin Small Cap Growth Fund, now known as Franklin Small-Mid Cap Growth Fund, according to the complaint. Regulators have described such deals as ‘sticky asset’ arrangements — and consider them among the more serious violations in the fund scandals because the fund company directly benefits by getting additional management fees. Read the complaint filed against Franklin Resources by Massachusetts regulators.”

“Such rapid in-and-out trading, often called market timing, lets favored investors skim profits from long-term shareholders. The practice involves buying a fund before its net asset value, set at 4 p.m. Eastern time each trading day, fully reflects the value of its holdings. In fund prospectuses, Franklin, which manages $337 billion, said it didn’t permit market timing.”

” ‘This is outrageous behavior,’ Mr. Galvin said. ‘The company put a price on cheating their customers. The price was a $10 million investment in a hedge fund. The quid pro quo was obvious.’ “

“The Securities and Exchange Commission has concluded its own investigation of Franklin, which began in early November and is broader than the alleged Calugar trading, according to a person familiar with the SEC inquiry. The agency is in ‘serious’ talks with Franklin over settling its own civil-fraud charges over market-timing allegations that could be resolved within weeks, this person said.”

“In a statement, Franklin Resources, which operates under the name of Franklin Templeton Investments, said: ‘Franklin Resources’ first priority is to protect the best interests of our funds’ shareholders and our clients, and we are confident that none of them was harmed by these investments.’ “