Sep. 24–MADISON, Wis.–The board that oversees Wisconsin’s college savings programs on Tuesday rejected state Treasurer Jack Voight’s proposal for an independent audit related to allegations StrongCapital Management Inc. allowed improper trades in some of its funds.
Strong was one of four mutual fund companies accused earlier this month by New York Attorney General Eliot Spitzer of allowing a New Jersey hedge fund, Canary Capital Partners LLC, to make short-term trades in five of its funds in exchange for fees and deposits in longer-term accounts.
One of those funds, the Strong Growth Fund, is offered as an investment in the state’s college savings programs — EdVest and Tomorrow’s Scholars.
During a meeting Tuesday, the state College Savings Program Board strongly encouraged Strong to say it will reimburse investors if it turns out they were damaged by the trades, and it approved a recommendation to the state Department of Administration that it begin negotiating with Strong to include other companies’ mutual funds in the EdVest program. Strong has an exclusive, five-year contract to administer and manage the money in the program.
Strong representatives also said for the first time that the outside professionals they have hired to conduct an internal investigation of Spitzer’s allegations are from Deloitte & Touche.
Rick Smirl, Strong’s chief legal counsel, told the board that the company is taking Spitzer’s allegations “very seriously.” Strong has brought in forensic accountants to investigate and is cooperating with regulatory authorities, Smirl said. He added that the firm is expending “tremendous resources” in investigating the allegations.
“We’re 10 days into it, and I hate to put a timetable on it. We’ll work as hard as we can to turn over every rock, and we’ll do our best to keep you apprised of the situation,” Smirl said.
Throughout the investigations, Strong will do what “is in the best interests of investors,” said Sarah Henriksen, Strong’s director of education planning.
However, those assurances rang hollow with angry investors present who wanted to know why Strong was the only one of the four fund companies Spitzer fingered that hadn’t agreed to reimburse participants if they lost money as a result of Canary’s trades.
“Why not make investors whole? . . . I’m exposed, and all I’m given is double speak . . . I’ve busted my tail to put money away for my children’s education, and I’ll bolt when I’m ready,” said Paul Edelen of Middleton.
After the meeting, Henriksen said Strong couldn’t promise to reimburse investors at this point because it needed to find the answers before it proposed a solution.
“We are encouraging investors to wait till the facts come out before they make any significant decisions for the long term,” she said.
Board members called Voight’s recommendation to request the state-controlled investigation premature. Investigations by Spitzer, the U.S. Securities and Exchange Commission and Strong, as well as a number of class-action lawsuits pending against Strong, make for “too many people chasing this trail,” said Rolf Wegenke, of the Wisconsin Association of Independent Colleges and Universities and a board member.
“My concern is that if we throw our hat into the ring without the Department of Justice’s advice, we might make things worse,” said Wegenke, whose 9-year-old son has an EdVest account.
Voight, vice chairman of the board, said an outside audit is needed.
“The state conducts independent audits of other contracts it has, and we don’t allow those other contractors to conduct their own audits and bless that,” Voight said. Audits of outside contractors are normally initiated by the Legislature’s Joint Audit Committee.
Rhonda Frank-Loron, a Madison attorney who said she has $6,000 in EdVest accounts for her children, sided with Voight.
“I don’t have faith in Strong’s auditors. They’re only going to show what they want to show. I’m really disappointed that the board didn’t appoint an outside auditor and stick Strong with the bill,” Frank-Loron said after the meeting.
Meanwhile, because of the exclusive five-year contract it signed with the state in 2001, Strong could refuse to broaden the number of mutual fund choices in the EdVest program. Voight said he doubted Strong would do that though, because it had last year suggested to the board it could pursue agreements with other fund companies to add their funds in the program.
The board at Tuesday’s meeting also voted unanimously to pursue discussions with the state attorney general’s office regarding how to respond to one of the lawsuits filed against Strong in which it is named as a defendant and to make sure it is fulfilling its fiduciary responsibility.
Voight said he was willing to wait two weeks to hear what the attorney general says but hasn’t given up on the idea of a state-controlled audit.
By Kathleen Gallagher and Kevin Murphy.
THE VOTES
The College Savings Program Board on Tuesday:
–Voted to table a motion to ask Strong to submit to a state-controlled audit.
–Voted unanimously, after state Sen. Alberta Darling (R-River Hills) left, to strongly request that Strong agree to reimburse any costs investors in state college savings programs incurred as a result of Strong allowing hedge funds to market time in its funds.
–Voted 5-2 to recommend to the Department of Administration that it expand the EdVest program to include offerings from other mutual fund companies besides Strong. Paul C. Adamski of Stevens Point and J. Michael Clumpner of Janesville voted against the proposal.
Attending or represented at the meeting besides Adamski, Clumpner and Darling were board members:
James A. Senty, State of Wisconsin Investment Board; Toby Marcovich, University of Wisconsin System Board of Regents; state Treasurer Jack C. Voight; Rolf Wegenke, Wisconsin Association of Independent Colleges and Universities; and Michael D. Wolff, state Department of Administration.
Absent were board members state Sen. Jeff Plale (D-South Milwaukee) and L. Anne Reid of the Wisconsin Technical College System.
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