“No harm, no foul,” writes Tom Lauricella in today’s Wall Street Journal.

“So say some mutual-fund companies in response to allegations that they allowed certain traders to improperly buy and sell fund shares. Because other fund shareholders seemingly suffered little or no financial harm from some of these trading arrangements, the firms involved are invoking the sports adage — that there’s no harm so there’s no foul — as a defense against regulators pursuing fraud and similar charges. However, experts doubt this defense will be enough to sway investigators.”

“Franklin Resources Inc., which operates the Franklin Templeton and Mutual Series fund groups, is one fund company using this defense. In an administrative complaint last month, Massachusetts regulators claim that Franklin employees allowed a trader to rapidly buy and sell shares in Franklin Small Cap Growth Fund despite prospectus language saying the fund did ‘not allow investments by market timers.’ “

“But Franklin contends no rules were broken. The company says the trader lost about $700,000 in making three purchases and sales of fund shares in a month. In its written response to the Massachusetts charges, the company used variations of the phrase ‘no harm’ five times in the first four paragraphs.”

“Meanwhile, Pacific Investment Management Co., or Pimco, which was accused in February by New Jersey investigators of allowing a hedge fund to conduct rapid trading in Pimco bond funds, said in a letter to clients signed by Bill Gross, Pimco’s chief investment officer, and Pimco Chief Executive Officer William Thompson that the trading ‘harmed no shareholders.’ “

“Indeed, Pimco stock-fund officials in a separate note said that an independent investigation ‘concluded that shareholders of three funds had actually benefited from the trading and that returns on the remaining fund had been reduced by less than $1.2 million.’ “

“At the center of the six-month-old investigations into trading abuses is a practice known as market timing. Market timing is intended to take advantage of “stale” fund-share prices that understate the value of the securities in a fund’s portfolio. While market timing isn’t illegal in itself, timing activity can result in fraud charges if a fund company allows such trading while pretending to block it.”

“The share-trading scandal already has produced settlements in which the damage done to fund shareholders appears to have run into the hundreds of millions of dollars. According to people familiar with the investigations of Alliance Capital Holding LP and Massachusetts Financial Services Co., market timers likely skimmed a total of more than $300 million from long-term shareholders by their rapid trading. Both firms settled charges without admitting or denying wrongdoing.”

“But the allegations against those firms involved a large amount of improper trading. Companies in which such trading wasn’t as widespread argue the damage suffered by shareholders was likely much smaller, if it existed at all, a claim the firms are using as a defense.”