Mutual Fund Billionaire Accused of Fraud in Suit
JANUARY 14, 2015 3:21 PM January 14, 2015 3:21 pm 9 Comments
Charles B. Johnson built Franklin Resources, the publicly traded mutual fund business, into a juggernaut before he retired.Credit Robert Holmgren
Charles B. Johnson has been lauded for numerous accomplishments. He built Franklin Resources, the publicly traded mutual fundbusiness, into a juggernaut that has nearly $900 billion under management and a market value of about $34 billion. He is a highly respected philanthropist, recently pledging $250 million to Yale University, his alma mater. He is said, by Forbes, to be worth about $6.5 billion and is the largest single shareholder of the San Francisco Giants, the reigning World Series champions.
But now Mr. Johnson, 82, stands accused of helping defraud the heir of one of the earliest investors in Franklin Resources out of $150 million.That accusation is at the heart of a lawsuit filed on Wednesday in federal court in San Francisco by Anthony P. Miele III of Manhattan, whose father left him Franklin stock worth $16,000 after his death. Mr. Miele contends he did not know for years about the existence of the shares, which he says are now worth $130 million, excluding unpaid dividends, and that Mr. Johnson and others concealed them from him.
The convoluted tale, according to the complaint, goes back more than 40 years and features boldface names, the darker side of the investing world and even a hint of violence.
In 1947, Rupert Johnson started what became Franklin Resources and 10 years later turned the business over to his son, Charles. In August 1971, Mr. Johnson decided to take Franklin public in an initial public offering underwritten by the Mayflower Securities Company, a New York brokerage firm owned by Eugene Mulvihill. A year later, Franklin used its stock to acquire the much larger Winfield & Company, an asset-management company in San Mateo, Calif.
Despite the Winfield acquisition, business was not great. There was a bear market afoot, and Franklin’s assets under management — a crucial barometer of success — declined 35 percent in 1973. The company suffered a small operating loss. Mr. Johnson turned to Mr. Mulvihill to see about obtaining a loan. For unknown reasons, Mr. Mulvihill asked a close friend and former Lehigh University classmate, Anthony Miele Jr., a New Jersey businessman, for the money. Mr. Miele was the controlling shareholder of several highly successful sludge and waste-management businesses in New Jersey and the Philadelphia area. He also owned Stash’s, an Italian restaurant in Orange, N.J.
At a meeting of Mr. Miele, Mr. Johnson, Mr. Mulvihill and Robert E. Brennan — a rising star at Mayflower who was later sentenced to nine years in prison for money laundering and bankruptcy fraud at First Jersey Securities — Mr. Miele agreed to lend Mr. Johnson $100,000. The money was to be used “to solidify the Winfield acquisition,” according to the complaint, which goes on to explain that although “no documentation of that loan appears to exist,” Mr. Johnson claimed it “was documented with a promissory note and listed on the public books and records of Franklin as part of its capital structure.”
Mr. Johnson also contends, according to the complaint, that 4,000 shares of Franklin stock were given to Mr. Miele as a bonus for providing the loan. According to the complaint, the stock certificate was issued to a trust that Mr. Miele established for his son, the plaintiff. A little more than a year later, Franklin’s records show that the 4,000 shares were voted at the annual shareholders’ meeting on March 21, 1974. Then on Nov. 8, 1974, while having dinner at Stash’s, Mr. Miele died “suddenly and unexpectedly,” apparently of a heart attack. Mr. Miele was 39; his son was 3.
According to the complaint, Mr. Miele’s son was never informed, until years later, of the existence of the trust with the 4,000 Franklin shares. At the time of Mr. Miele’s death, the shares were worth $4 each, for a total of $16,000.
The original 4,000 Franklin shares have turned into 2,531,250 shares, with a value of about $130 million, with an additional $20 million in uncashed dividends, according to the complaint. But through “a variety of acts including breaches of fiduciary duty, forgery, theft, diversion and a cover-up,” neither the shares nor the dividends have ever been delivered to Mr. Miele, it contends.
The lawsuit accuses Mr. Johnson of breach of fiduciary duty, negligence, fraudulent concealment and negligent prevention of assistance. It makes similar accusations against Franklin Resources. In an interview, Mr. Johnson, who cooperated for a time with Mr. Miele’s inquiry into the stock but then stopped, denied the accusations.
The complaint, drafted by Mr. Miele’s lawyers at Liddle & Robinson, contends that Richard Hanrahan, at the Bank of New York, offered to find Mr. Miele in the early 1990s, using the Social Security number it had on file, but Mr. Johnson and Franklin declined the offer. Instead, according to the complaint, when Mr. Johnson learned that New Jersey was about to take control of the trust because its owner appeared to have abandoned it, he asked Mr. Mulvihill to find Anthony Miele Jr. By then, Mr. Johnson, who was chairman of the National Association of Securities Dealers at the time, was most likely aware that Mr. Mulvihill had been convicted of numerous crimes, including forgery, and had been barred from the securities industry.
In any event, that is when Mr. Johnson says he learned of Anthony Miele Jr.’s death nearly 20 years earlier. Mr. Johnson then “delegated to Mulvihill” the responsibility of making sure the Franklin stock was delivered to his son, according to the complaint.
Mr. Mulvihill told Mr. Johnson “he would take care of it,” according to the complaint. At that point, Mr. Johnson recalled seeing that the stock had been transferred to a “street name” — meaning that a brokerage firm held the stock in its name — and the Bank of New York records show that the account address was changed to F.N. Wolf & Company, a successor company to Mayflower and First Jersey, run by a friend of both Mr. Mulvilhill and Mr. Brennan’s. F.N. Wolf ceased operating in December 1994 and filed for bankruptcy under regulatory scrutiny.
In 2008, for reasons not entirely clear, the Bank of New York Mellon Corporation, the successor to Bank of New York, apparently conducted an investigation into the Franklin shares with unspecified outside lawyers questioning employees at the Bank of New York, including Mr. Hanrahan, and Franklin employees about what had transpired. “At no point during this investigation was Miele III ever contacted regarding his shares or dividends in Franklin,” according to the complaint. Reached at his New York office, now known as Computershare Shareowner Services after being spun off from Bank of New York, Mr. Hanrahan declined to comment.
According to the complaint, when Mr. Johnson and Mr. Mulvihill would see each other in Nantucket, Mass., where they both had homes, Mr. Mulvihill would tell Mr. Johnson that the Miele children would never forget what he did for them, implying that thanks to Mr. Johnson, Mr. Miele had received the stock. The last such conversation between these two men was in the summer of 2012, just months before Mr. Mulvihill died.
Anthony Miele III first learned of the stock by happenstance, according to the complaint.
During the summer of 2012, Anson Beard Jr., a longtime seniorMorgan Stanley executive, published a book, “A Life in Full Sail,” which is essentially an autobiography. Mr. Beard is the father-in-law of Veronica Miele, Anthony Miele III’s sister. In the book, a copy of which Mr. Beard had sent to his longtime friend Mr. Johnson, was a picture of Ms. Miele. Mr. Johnson called Mr. Beard and asked whether she was the daughter of Anthony Miele Jr. “who went to Lehigh in the 1950s.” When Mr. Beard said that she was, Mr. Johnson “expressed hope” that the Miele children had received the Franklin stock. When Mr. Beard explained to Mr. Johnson that they had never received the shares, according to the complaint, Mr. Johnson mailed Mr. Beard a copy of the 1974 Bank of New York ledger showing that the shares had been voted at the shareholders’ meeting. (In a February 2014 email to Liddle & Robinson, Mr. Johnson denied there were any ledgers or books from shareholder meetings; the complaint then states that any further cooperation from Mr. Johnson would require a subpoena.)
During the second half of 2012, before his death on Oct. 27, Mr. Mulvihill had a series of increasingly strange conversations with Mr. Miele about the Franklin stock, according to the complaint. On Aug. 21, Mr. Miele called Mr. Mulvihill on his cellphone, but Mr. Mulvihill told him he could not talk and that he was with Mr. Brennan. Three days later, Mr. Miele again called Mr. Mulvihill, who told him he was at the airport in Nantucket and couldn’t talk but was going to meet Mr. Johnson about the Franklin stock.
In mid-October, Mr. Mulvihill met with Mr. Miele and told him that because the mail related to Mr. Miele’s Franklin stock kept getting returned to Franklin — and Mr. Johnson had asked Mr. Mulvihill to take care of it — Mr. Mulvihill contacted John Steinbach, a business partner and the stepson of Abner Zwillman, known as the Al Capone of New Jersey. Mr. Mulvihill told Mr. Miele that Mr. Steinbach had “signed something” at Mr. Mulvihill’s request for Mr. Miele.
When Mr. Miele contacted Mr. Steinbach, according to the complaint, Mr. Steinbach admitted to “signing a document” in Mr. Miele’s name.
Mr. Mulvihill told Mr. Miele that if he “ever investigated this matter, Robert Brennan would hire a Russian hit man to kill [Miele III] and your family,” according the complaint. On Aug. 22, 2013, Mr. Steinbach called Mr. Miele and invited him to play in a golf tournament for Mr. Mulvihill and reminded him that Mr. Mulvihill “got money” for Mr. Miele. At the golf tournament, in September, Mr. Steinbach told Mr. Miele that he “ought to leave things from the past alone” and that people “did a lot of things back then that they don’t want brought back up.”
Mr. Brennan, who was released from prison in 2011, could not be reached for comment; there was no answer at his New Jersey phone number. For his part, Mr. Steinbach, reached in Florida on his cellphone, said that although he was “best friends” with Mr. Mulvihill and knows both Mr. Brennan and Mr. Miele, he “never signed anything” that would have prevented Mr. Miele from receiving the Franklin stock. He said he had had many conversations with Mr. Miele over the years but never threatened him, although he conceded he may have told him to let the past stay in the past.
“I don’t deserve to be involved with this situation,” he said. “I’m just a small-time guy with a famous father.”
Reached at his Palm Beach home, Mr. Johnson, who stopped working at Franklin Resources in June 2013 after 56 years, said that he was not aware of the lawsuit but that he thought the “Mieles are on a fishing expedition for their own negligence.” His only involvement with the stock described in the complaint came years ago, he said, when he notified the Mieles just before New Jersey was going to take over control of the trust.
“I’m retired,” he added.