Nov. 20–Richard S. Strong’s trades in his company’s mutual funds exceeded prospectus guidelines, the managing director of Strong Financial Corp.’s institutional business said Wednesday.
Managing Director F. Jon Baranko said Strong’s prospectus says two in-and-out trades in a month or three in-and-out trades in a quarter can be viewed as market timing.
“Dick Strong’s activity was in excess of that,” Baranko said at a meeting of the Milwaukee County Pension Board. “We proactively disclosed this activity to the regulators.”
But another Strong official said Baranko’s explanation of the prospectus needed to be “clarified.”
Spokeswoman Stephanie Truog provided a written statement saying that the company’s mutual fund prospectus says Strong reserves the right to reject any purchase requests if they will be disruptive to the efficient management of the fund. Truog pointed to an October statement by Richard Strong in which he said he did not believe his trading in Strong funds was disruptive.
Strong is chairman and founder of Strong Financial, the Menomonee Falls holding company for Strong Capital Management Inc., which manages the Strong family of mutual funds.
Strong’s internal investigation into its dealings with the hedge fund, Canary Capital Partners LLC, is 90 percent to 95 percent complete, and Canary’s trades were not “disruptive” to the four funds involved, Baranko told the pension board.
Baranko also confirmed that a high-level Strong Financial Corp. executive, Anthony J. D’Amato, was involved in arranging a deal with a New Jersey hedge fund that has the company in the center of the growing mutual fund industry scandal.
“We are looking to regulators for direction on how to calculate damages,” Baranko said. “We haven’t received that yet — we’re not even sure if there are damages.”
Strong’s reception desk referred a cold call by Canary Capital Partners LLC to D’Amato, a member of Strong’s office of the CEO, Baranko said.
“They wanted to talk about market timing and cash management and alternative investments and our products, and it landed in his lap,” Baranko said. “He forwarded it on to our high net worth business, and that is how the relationship got going.”
The pension board was asking about D’Amato because of a Wall Street Journal story Wednesday that cited sources “familiar with the matter” saying D’Amato met with Canary head Edward Stern in October 2002 to discuss allowing Canary to conduct market timing activities in certain of Strong’s funds.
New York Attorney General Eliot Spitzer implicated Strong and three other firms in early September in allowing Canary to make improper trades in their funds. Spitzer also said Strong contacted its transfer agent and clearing broker so Canary’s “flipping” wouldn’t be rejected, and provided Canary with detailed lists of certain funds’ portfolio holdings so it could short the stocks the portfolios contained.
Spitzer has leaked information to the press suggesting that in exchange for certain privileges, Canary invested $500,000 in a Strong-affiliated hedge fund.
Market timing involves trading in and out of mutual funds to take advantage of instances where the fund is not valuing some of the stocks in it correctly. It is not considered criminal, but hurts the fund’s long-term shareholders because they are forced to share some of the potential value of the stocks with them.
“The ironic thing is that our mechanisms in place to detect market timing were in place in other distribution channels that were most susceptible to market timing,” Baranko told the board. “The high net worth channel is not a channel where we see that type of activity, so it wasn’t monitored as aggressively as some of the other channels. That was clearly a breakdown in our system.”
Strong moved to center stage of the growing scandal that has rocked the $7 trillion mutual fund industry grew in late October when Spitzer leaked to the press that he was considering taking action against Strong personally and didn’t rule out criminal charges.
Spitzer is saying Strong made trades in Strong funds on behalf of his own account as well as accounts he set up for family and friends that resulted in profits of as much as $600,000. Spitzer has not yet filed charges against Strong.
D’Amato “has not been involved in any market timing or personal trading activity on his own,” Baranko said.
Board member Guy Stuller asked Baranko if Strong was privy to information other investors didn’t have.
“I can tell you that he doesn’t even have a computer on his desk and doesn’t know how to use a computer,” Baranko said. “Whether he got some sort of physical reports or something I don’t know — but I don’t know the facts surrounding the case to really comment on that.”
Baranko told the pension board that Strong would “aggressively release” information about the matters related to Strong’s personal trading and Canary’s trading.
He also said he did not believe Richard Strong, in making his personal trades, had any “intent to defraud investors.”
By Kathleen Gallagher and Dave Umhoefer
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