Nov. 7–Investors last month pulled $136.2 million out of equity funds managed by Strong Capital Management Inc., one of the companies in the cross hairs of New York Attorney General Eliot Spitzer’sinvestigation of alleged abuse in the mutual fund industry.
Meanwhile, the Oregon state treasurer said Thursday he would recommend his state fire Strong as a manager of its tax-advantaged college savings program — a move that would pull another $134 million from Menomonee Falls-based Strong.
The $136.2 million that left Strong in October was the most in any month this year for the company, and comes on top of about $90.2 million that left the equity funds in September, said Robert Adler, president of the AMG Data Services, an Arcata, Calif., firm that monitors how much money flows in and out of mutual funds.
AMG Data figures show other companies implicated in the probe also saw investors yanked money out of their equity funds in October, topped by Janus funds, with a net outflow of nearly $1.6 billion.
Spitzer went public with his accusations of improper trading in the mutual fund industry on Sept. 3, naming Strong and three other companies for allegedly giving special trading opportunities to a hedge fund — a practice he said hurts long-term shareholders of mutual funds.
Since that time, Spitzer’s probe has widened to include other mutual fund companies, but he repeatedly has singled out Strong because allegedly improper trades were done by the chairman of the company himself, Richard S. Strong.
Richard Strong is accused by Spitzer of conducting improper “market timing,” or quick trades in his company funds, to capitalize on market-moving news to raise as much as $600,000 from 1998 to at least 2001 for himself, his family and friends.
Strong has said he doesn’t believe the transactions were disruptive to the funds, but he pledged to personally reimburse the funds for any financial losses that may have taken place as a result of the trades.
Given the barrage of bad publicity, the amount of money flowing out of Strong equity funds in the two months since the investigation became public is not that big, said George Reis, president of George V. Reis Investment Group in Two Rivers. Reis said Spitzer has tried to make Richard Strong “the poster boy” for reform of mutual funds.
“Any outflow is obviously not good, but considering the adverse publicity . . . the amount is not a tremendous amount,” Reis said.
Strong spokeswoman Stephanie Truog said the company would not comment on the outflow amount, but asked that it be “put into the context of assets under management here, which is $42.7 billion.”
Despite the troubles with Spitzer, most Strong funds have performed well this year, which also could make some investors reluctant to move their money. Through Oct. 31, 73 percent of all of Strong’s funds were in the top half of their peer group charted by the Lipper Index Service. Strong runs 66 funds.
But if the majority of investors in Strong funds are not worried enough to take their money elsewhere, Oregon’s State Treasurer Randall Edwards certainly seems to be.
Saying that Oregon’s college savings plan “cannot continue to do business with a company mired in ethical and managerial troubles,” Edwards Thursday called on the board overseeing the savings plan to dump Strong.
“My first priority is to maintain the trust and confidence that our investors have in the Oregon College Savings Plan,” Edwards said. “Strong has violated that trust. And while we have no reason to believe at this time that Oregon college savings investors have been financially harmed by Strong, I am taking action to ensure that Oregonians can feel safe and confident when investing for their future college savings needs.”
Edwards, in a prepared statement, went on to say that “allegations against Richard Strong raise serious questions about the ethics and vitality of this firm.”
“This goes to the very top and calls into question the firm’s long-term stability. These latest developments could cause a serious distraction to the firm’s money managers and professional staff and upset the entire organizational structure,” Edwards said.
Strong issued a statement in reaction to the move by Edwards. The statement, by Sarah Henriksen, the director of education planning for Strong Financial Corp., the parent company of mutual fund manager Strong Capital Management Inc., said in part:
“We are disappointed with the Oregon treasurer’s recommendation and hope that the important changes being made at Strong give all investors confidence that they can maintain their relationships with our professionals. We believe these changes will result in an even more robust institution that will continue to have at its core an enormous respect for the responsibility our clients entrust in us to manage their investments.”
In a letter to shareholders this week, the company said the board of Strong Financial Corp., which Richard Strong founded in 1974, is being reconstituted so that the majority of its members are independent. Currently the corporate board has two members — Richard Strong and Richard T. Weiss, according to state regulatory records.
Last Sunday, Strong resigned as chairman of Strong Mutual Funds’ independent board of directors, the panel responsible for representing the interests of shareholders of the mutual funds. He remains a member of that board.
The funds’ independent board has commissioned its own investigation of the improper trading allegations, and hired a consulting firm to assist it in that effort. The board said it has hired David S. Ruder, a former chairman of the Securities and Exchange Commission, to review policies and procedures and compliance issues related to the regulatory investigation.
In a letter to customers dated Tuesday, the independent board said it would take “all reasonable steps to ensure that the Strong Funds have the most comprehensive and effective policies in the industry to prevent and to deter improper trading in the funds and any other activity detrimental to fund shareholders.”
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