Sep. 19–Richard S. Strong, founder and chairman of Strong Capital Management Inc., said Thursday that his firm has hired outside professionals to carry out an internal review related to New YorkAttorney General Eliot Spitzer’s allegations of improper trading.
Thursday was the first time Strong has spoken publicly about the allegations Spitzer made Sept. 3 against the Menomonee Falls-based investment company and three other mutual fund firms.
“We have hired outside professionals to conduct our own comprehensive internal review,” Strong told about 1,800 customers and their guests at a dinner at the Midwest Airlines Center.
“The evaluation is not yet complete — we look forward to an objective review of the facts,” he said.
A letter to clients Strong posted on its Web site Thursday also discloses the internal review, and it adds that Strong is “working diligently to cooperate with regulatory agencies.”
Strong is the last of the four mutual fund companies to comment about Spitzer’s allegations that they allowed a New Jersey hedge fund, Canary Capital Partners LLC, to make short-term trades in exchange for fees and deposits in longer-term accounts.
Strong, the only privately held company among the four firms, is the only one that hasn’t promised to repay shareholders if its review shows they lost money as a result of the hedge fund’s trades.
Along with Strong, Bank One has said it is conducting an internal review. Bank of America and Janus have commissioned independent reviews of their firms’ involvement with Canary.
Spitzer’s complaint, filed against Canary, implicates Strong in allowing Canary to market-time by trading five Strong funds more actively than other shareholders. It also accuses Strong of providing to Canary lists of those funds’ holdings more often than other shareholders received them.
In exchange, the complaint says Strong got commitments from Canary to keep as much as $18 million in a Strong brokerage account to trade the funds, and to keep another, unspecified amount of “substantial additional assets” in Strong hedge funds.
Richard Strong expressed confidence in his firm’s staying power during the brief speech to customers, saying Strong’s investment expertise and attention to customers would provide benefits to clients “during the next decade.”
Strong said his firm, which has 20 compliance people and eight attorneys on staff, takes the concerns that have been raised “very, very seriously.”
“Rest assured, our actions will reflect your best interests and our fiduciary responsibility to you,” he said.
Strong’s letter to customers distinguishes between the two allegations Spitzer is making: allowing late trading and allowing market-timing.
Spitzer’s complaint does not accuse Strong of allowing late trading, which creates an opportunity to use after-market information. Such trading, which involves buying mutual fund shares at the closing price after the market has closed, is illegal.
The complaint accuses Strong of allowing Canary to market-time its funds.
Market-timing involves short-term, “in-and-out” trading of mutual fund shares, which hurts the longer-term shareholders for whom mutual funds are designed. It isn’t illegal but is frowned upon in the industry.
“We believe that market-timing is a complex issue that requires the consideration of multiple factors in its evaluation,” Strong’s letter says. “We are supportive of a thoughtful industry-wide review of this issue by regulators, legislators and industry professionals.”
Eight lawsuits — six of them class-actions and two of them derivative complaints seeking to replace the six Strong Growth funds trustees as representatives for the interests of shareholders — have been filed in Wisconsin courts since Spitzer made his allegations. Those lawsuits will likely be consolidated into one.
Both Spitzer and the U.S. Securities and Exchange Commission have said they are continuing to actively investigate trading practices at mutual fund companies. Spitzer said at a press conference Tuesday his “widening” investigation is likely to result in numerous other charges.
—–
To see more of the Milwaukee Journal Sentinel, or to subscribe to the newspaper, go to http://www.jsonline.com.
(c) 2003, Milwaukee Journal Sentinel. Distributed by Knight Ridder/Tribune Business News.
BAC, ONE,
