Oct. 31–Saying he was prepared to step down if necessary as chairman of the Menomonee Falls-based investment firm that bears his name, Richard S. Strong pledged Thursday to reimburse Strong fundsfor any financial losses that occurred as a result of his alleged improper trading.
Independent directors of Strong funds launched their own investigation of trading in Strong funds by employees, including Richard S. Strong.
Strong Capital also named David S. Ruder, former chairman of the Securities and Exchange Commission, to review its policies and recommend changes.
A source close to the investigation said Spitzer’s office subpoenaed records from Milwaukee-based Artisan Partners in September after seeing unusual trading activity that suggested market timing in certain Artisan funds.
The Massachusetts pension board voted unanimously to withdraw $1.7 billion from state retirement accounts managed by Putnam Investments, the Boston-based firm accused this week of defrauding investors.
A day after reports that the New York attorney general was planning to take action against Strong for making improper trades, Strong also promised in a statement to expand the firm’s corporate board, and said he had hired a former U.S. Securities and Exchange Commission chairman as a consultant.
Strong’s statement, which said the company is cooperating with the investigation, followed an announcement by the Strong Financial directors earlier in the day that they had begun their own probe after “becoming aware” of trades in the firm’s mutual funds by Strong and other employees.
Meanwhile, Milwaukee’s other major mutual fund manager, Artisan Partners LP, said it is cooperating with federal and state securities regulators after receiving a subpoena from New York Attorney General Eliot Spitzer in September regarding trades made in 2002 by New Jersey hedge fund Canary Capital Partners LLC in two of its mutual funds.
The firm said in a statement it had terminated Canary’s purchases in the funds in early 2003, “well before Artisan Funds learned of the New York Attorney General’s investigation.”
“We very clearly have an intent to resolve this issue at Artisan,” a source close to the investigation said. However, the source said the matter likely would not be addressed immediately.
Strong manages about $42 billion of investor money, and Artisan, formed by two former Strong employees — Andrew A. Ziegler and Carlene Murphy Ziegler — in 1995, manages nearly $30 billion.
Also on Thursday, Massachusetts’ pension fund board voted to withdraw $1.7 billion from state retirement accounts managed by Boston-based Putnam Investments. Also, federal prosecutors in New York and Boston have joined the probe into trading practices at Putnam, according to company officials and people involved in in the investigation, raising the possibility of criminal charges in addition to the civil fraud charges regulators filed in that case.
The developments Thursday are the latest chapter in an ever-widening investigation into the ethics and self-enrichment practices of the investment industry. Spitzer’s probes have so far reaped a $1.4 billion global settlement from 10 Wall Street investment banks, a $100 million fine from Merrill Lynch, and prompted radical changes in how the investment world operates. Spitzer is now calling for changes in how the mutual fund industry is regulated.
And, it appears, Spitzer is also poised to take action — he hasn’t ruled out criminal charges — against Strong, the highest-ranking fund industry executive yet to land in the attorney general’s net.
Strong’s statement said Richard Strong’s questionable trades occurred in certain trusts, retirement accounts and accounts set up for minors for which he and his friends and family were beneficiaries.
Spitzer is alleging that from 1998 through at least 2001, Richard Strong traded in and out of his firm’s funds to reap as much as $600,000 in quick profits for those accounts.
“Over the years, only a small number were next-day transactions,” and most of them weren’t “disruptive” to the funds, the Strong statement said.
The situation pits two public relations titans against each other, and the stakes are huge for both.
Strong risks losing much of the $42 billion of savings 460,000 American households have entrusted to his firm to invest if enough of them talk with their feet. Spitzer risks damaging his career goals if he’s seen as too much of a politically motivated vigilante.
Strong’s investor center at its Menomonee Falls headquarters was quiet late Thursday afternoon. There were no long lines, and customers waited only a few minutes to see investment consultants.
The company didn’t hand out any literature or other materials addressing the Spitzer investigation. A Strong consultant made a general inquiry of a customer who came to close her account, but did not discuss the investigation in depth or try to persuade the customer not to take that action.
Some consultants to institutional investors such as 401(k) plans and pension accounts, though, say their clients are already planning to pull their investment dollars out of Strong, Putnam and other firms fingered by Spitzer. One of the biggest questions, though — with Spitzer announcing, filing and leaking to the press new charges regularly — is the question of where to move the money.
“It’s a big logjam,” said Jim Wenzler, research director at Alpha Investment Consulting Group LLC in Milwaukee.
Investors have tough decisions to make: whether to change mutual fund companies, and if so, which money management firm to entrust their money, he said.
“The first decision has been made by a lot of people,” Wenzler said. “Money’s going to move — it’s just a matter of when.”
Some are also trying to decide, despite Spitzer’s obvious successes, whether he really deserves the admiration and status being given to him.
“Spitzer’s latest slam on Strong without indicting him or pointing to specific evidence is political grandstanding at best, or misuse of his office to mete out vigilante justice in the media rather than the courtroom where he belongs,” said Mike Krystowiak, a software developer from Wauwatosa.
“Our record of standing up for small investors speaks for itself,” said Brad Maione, a spokesman for Spitzer.
The statement issued by Strong Thursday said Strong Financial Corp., the holding company for Strong Capital Management Inc., would expand its board so it is composed of a majority of independent directors. The firm’s board currently consists of Strong and a company portfolio manager, Richard T. Weiss.
Strong also said it has hired two former SEC officials — David S. Ruder, a former U.S. Securities and Exchange Commission chairman, and Richard S. Anderson, former supervisory examiner for the SEC’s Midwest office — to review Strong’s policies and procedures and the SEC and compliance systems.
“I am prepared to play whatever role and do whatever is necessary and appropriate to serve the vital interests of our investors,” Strong said in the statement. “If it becomes appropriate, I would be prepared to step aside to enable new leadership to bring new energies to this company.” The fact that Strong didn’t step down, despite a rash of rumors suggesting he would after it came out Wednesday that he was being targeted by Spitzer, disappointed some.
“I think that if he distanced himself from the day-to-day operation of the firm, it would go a long way toward restoring credibility,” said Bob Dignan, president of Cardinal Investment Services Inc. in Wauwatosa.
The firm has suffered departures over the last year of several key executives though — including Bradley C. Tank, the most senior member of Strong’s now-four member office of the CEO and director of its fixed income investment area, and Jody R. Lowe, Strong’s longtime managing director of communication.
“He doesn’t have very deep bench. There are not a lot of executive-level employees there,” said Bob Landaas, president of Landaas & Company Investment Services in Milwaukee.
Among the state’s big public retirement systems, neither the State of Wisconsin Investment Board nor the City of Milwaukee pension fund has money invested with Strong, representatives of those organizations said.
State Treasurer Jack C. Voight has continued calls for a state-controlled audit of Strong and set up an emergency meeting of the Wisconsin College Savings Program’s board. The program includes Edvest and Tomorrow’s Scholar, which have more than half of the $936 million of assets in them invested in Strong funds.
Milwaukee County’s employee retirement system has 9 percent, or $122.9 million, of its pension-fund assets invested with Strong. The fund also has nearly $49 million invested with Artisan.
The system’s administrators are concerned and are watching the Strong situation closely to see whether Strong’s reputation suffers, but no quick decisions are planned, said Pension Board Chairman Walter Lanier, a Milwaukee attorney.
“They’ve done a good job,” Lanier said. “You’ve got personal allegations about one individual. That doesn’t reflect on their performance.”
Meanwhile, Lanier on Thursday afternoon was still thinking about his reaction to the news that Spitzer had Strong in his sights.
“I was not expecting to see the newspaper headline I saw today,” Lanier said.
Greg Borowski, Janine Ghelfi, Paul Gores, Doris Hajewski, Avrum D. Lank and Dave Umhoefer of the Journal Sentinel staff and The New York Times and The Boston Globe contributed to this report.
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