Compliance August 10, 2005

Judge: Texas Exec Commingled K Plan Funds

August 10, 2005 (PLANSPONSOR.com) - A Texas federal judge has ruled that the executive of a bankrupt company who had been a K plan fiduciary violated the Employee Retirement Income Security Act (ERISA) by mixing plan contributions with general corporate funds.
Reported by

US District Judge Nancy Johnson of the US District Court for the Southern District of Texas agreed with claims by an attorney representing the US Department of Labor (DoL) that defendant William Stuart should be held accountable for the nearly $50,000 in participant contributions that was diverted into a corporate bank account, according to a BNA report.

Johnson wrote that the “evidence demonstrates that [the executive] received employee payroll deductions intended for the Plan and used them to fund company business operations and pay corporate debts instead of investing them.”

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However, rejecting the DoL’s contention that a permanent injunction should be placed on Stuart, the court said that the executive’s actions did not suggest “a desire to make money ‘at all costs.'” The court also noted that the executive’s breaches of fiduciary duty were derived from one “indiscretion.”

According to court background, Stuart was the chief executive officer of Crescent Services Corp., doing business as HTE8, during 2000. In January 2000, HTE8 adopted the HTE8 Plan Well Live Swell 401(k) Plan.

From September 15, 2000 through November 1, 2000, HTE8 made deductions from employee payrolls but the plan contributions did not go to the plan trust but went into HTE8’s general operating account. On January 8, 2001, HTE8 filed for bankruptcy.

The case is Chao v. Stuart, S.D. Tex., No. H-04-1115, 7/20/05.

Administration August 9, 2005

Bay State's Galvin Fines Franklin $5M

September 20, 2004 (PLANSPONSOR.com) - A Massachusetts securities regulator announced Monday that he slapped two units of Franklin Templeton with a $5 million fine for permitting an investor to market time their mutual funds.
Reported by

William Galvin, the Bay State’s Secretary of the Commonwealth, said Franklin Advisers Inc. and Franklin Templeton Alternative Strategies Inc. agreed to the fine and admitted to allowing the improper trades, Reuters reported. The California-based mutual fund firm agreed last month to pay $50 million to settle market timing charges with the US Securities and Exchange Commission (SEC).

Galvin said Franklin allowed a “known market timer” to invest in mutual funds in exchange for an investment in a company hedge fund, in an arrangement also called “sticky assets.”

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“This case was a blatant example of one rule for the ordinary investor but a different practice for a high roller,” Galvin said in a statement. “The admission is a clear signal to investors and the industry that this double standard is illegal and will not be tolerated.”

State and federal regulators have been pursuing a wide-ranging investigation of the mutual fund industry focusing primarily on market timing, late trading, and certain sales practices.

More information about Galvin’s case against Franklin Templeton is at  http://www.sec.state.ma.us/sct/sctft/ftidx.htm .

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