Oct. 30–The New York attorney general’s office plans to take action against Richard S. Strong on allegations that he profited from improper trades in and out of shares of his company’s mutual funds.
A spokeswoman for New York Attorney General Eliot Spitzer confirmed late Wednesday that the alleged trades were made on behalf of Strong’s own account as well as accounts he set up for family and friends. She also verified media reports that the trades took place from 1998 until at least 2001.
Strong is founder and chairman of Strong Capital Management Inc., the Menomonee Falls-based investment firm.
The alleged trading by Strong, who owns the majority of the firm he founded in 1974 and who is one of the wealthiest people in the United States, yielded at least several hundred thousand dollars in profits, according to reports confirmed by Juanita L. Scarlett, a spokeswoman for Spitzer.
“Our investigation is continuing. We have not ruled out criminal charges at this point,” Scarlett said.
The development is the latest in a fast-moving investigation of the mutual-fund industry that Spitzer began last month. The U.S. Securities and Exchange Commission also is investigating.
The trading Strong is alleged to have engaged in violates the so-called fiduciary responsibility money managers and their firms have to customers to treat shareholders’ money the same way they would treat their own.
“This is an outrage that should distress every mutual fund investor,” Spitzer said. “If you ever wanted proof that there were two sets of rules — one for insiders and one for individual investors — this is it.”
If Spitzer’s allegations are true, institutional customers of Strong Capital, such as 401(k) plans and pension accounts, likely will be forced to pull their money out of Strong, said Roy Weitz, publisher of FundAlarm.com, an online newsletter that offers advice on which mutual funds to sell.
“They’re on notice he’s a serial offender and that he’s not coming clean, so it seems to me as fiduciaries they have to leave — they can’t take the chance there’s more buried here,” Weitz said.
Statements in Strong funds’ legal documents say the firm discourages the practice of trading in and out of its funds, known as market timing.
Market timing is a strategy that uses short-term, “in-and-out” trades to take advantage of the fact that prices for mutual funds are set only once a day, while the stocks in them are priced constantly. It isn’t illegal, but is frowned upon in the industry because it has a detrimental effect on the longer-term shareholders for whom mutual funds are designed.
Strong, 61, and the firm he built from the ground up have run into problems with securities regulators before.
In 1994, Strong and his firm were sanctioned by the SEC for making illegal trades among its funds in the late 1980s and not telling investors about conflicts of interest. Two years later, in response to an action filed by the U.S. Department of Labor, Strong Capital agreed to reimburse certain pension accounts $5.9 million over related allegations.
In February 1997, Strong again attracted unwanted headlines when it bailed out three of its money-market funds that were holding short-term debt of Mercury Finance, a used-car lender that had failed to meet a payment. Strong said then that the default involved fraud and that it was doing the “right thing” by reimbursing investors.
Some professional investors, who said they thought the Mercury Finance securities were too risky for a money-market fund, viewed the incident as yet another example of Richard Strong’s aggressive investing style.
Strong spokeswoman Stephanie Truog, in a statement, declined to discuss Spitzer’s allegations.
“We are in the process of a thorough internal review with the assistance of outside professionals,” she said in the statement. “Given that we are still in the midst of that process, we don’t have more to say, other than that we are continuing to cooperate with regulatory agencies.”
Richard Strong’s lawyer, Stanley Arkin, said: “It’s my view that Dick Strong never did anything that was violative of any law.”
Spitzer’s office is considering taking action against the fund company and other employees in addition to Strong, Scarlett said.
Although Strong has employees whose job it is to police improper trading, they were steered away from examining the funds in which Richard Strong was trading, Spitzer told The New York Times. That indicates “there were a core of people at the top of the company who knew about this,” Spitzer said.
Strong manages nearly $43 billion of customer money and employs about 1,300 people. It is considered a medium-sized mutual fund company that competes nationally.
Earlier this year, Spitzer subpoenaed Strong’s records and accused the company of allowing Canary Capital Partners LLC to trade in and out of its funds in a complaint it filed against the New Jersey hedge fund. Canary paid $40 million in restitution and penalties.
Strong Capital Management also has an exclusive, five-year contract to administer and manage the money in the state’s EdVest college investment program.
State Treasurer Jack C. Voight, vice chairman of the board that oversees the state’s college savings programs, renewed his calls for an independent state audit of Strong. His effort to seek such an audit failed to win approval from the board last month.
“I think there is more credibility than ever” for the audit request, Voight said.
Voight said Wednesday night that he would ask for a special meeting of the Wisconsin College Savings Program Board to review the Strong situation.
Voight urged investors not to make rash decisions.
As of last month, investors in the state’s college savings programs, EdVest and Tomorrow’s Scholars, have more than half of the programs’ $936 million of assets in Strong funds.
The only Strong fund in the program that has been named by Spitzer as a target of market timers is the Strong Growth Fund. Investors have about $182 million, or about 19 percent, of the programs’ assets in that fund.
The New York Times, Associated Press and Washington Post contributed to this report.
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