Strong chief says inquiry comes as a surprise
Company is doing its own review of trading by hedge fund, he says
By KATHLEEN GALLAGHER [email protected], Journal Sentinel
Saturday, September 6, 2003
The New York attorney general’s investigation into questionable mutual fund trading practices at Strong Capital Management Inc. came as a “surprise” to Richard S. Strong, the company’s founder and chairman said in a letter to employees and clients.
“We can assure you we are turning over every rock at our firm as part of our own comprehensive review and that we are committed to acting in the best interests of our clients,” Strong wrote.
Strong sent the letter after New York Attorney General Eliot Spitzer accused his firm and three other mutual fund companies of giving a hedge fund special trading opportunities in return for its promise to make significant investments in some of the companies’ funds.
Strong is accused of allowing New Jersey-based Canary Capital Partners LLC to time its investments in five Strong funds and provided breakdowns of the holdings in those funds in exchange for a commitment from Canary to keep as much as $18 million in a Strong brokerage account to trade in those funds.
Canary also promised to keep another, unspecified amount of “substantial additional assets” in Strong hedge funds.
While allowing the timing is not technically illegal, such practices can hurt other shareholders in the fund by forcing its managers to buy or sell at the wrong time because the timers are moving money in or out.
If Strong did indeed allow the timing, it violated statements in Strong’s fund prospectus that said the firm actively sought to deter timers.
The fund trustees at Strong were surprised by Spitzer’s charges and believed that the company had been following policies against market timing, said William F. Vogt, a board member.
A meeting of the trustees about Spitzer’s investigation has been postponed until Tuesday, Vogt said.
Vogt, a senior vice president at IDX Systems Corp., wouldn’t comment further.
Another trustee, Neal Malicky, referred a reporter to a Strong spokeswoman.
“We will communicate with shareholders in other ways, but I think that anything at this point needs to come from her,” said Malicky, president emeritus and former chancellor of Baldwin-Wallace College in Ohio.
Strong has promised to cooperate with Spitzer’s investigation.
Other companies cited in Spitzer’s complaint were Bank of America Corp., Bank One Corp. and Janus Capital Group Inc.
All were accused of allowing Canary to engage in either market timing or late trading.
The complaint did not accuse Strong of allowing late trading.
Late trading involves purchasing fund shares at the 4 p.m. EST price after the markets close.
It is prohibited by New York state’s Martin Act and U.S. Securities and Exchange Commission regulations because it allows a favored investor to take advantage of post-market events not reflected in the share price at that day’s close.
Invesco Funds Group Inc., Legg Mason Inc., Vanguard Group and Millennium Management LLC, a hedge fund, were among at least six other companies that said Friday they’d received subpoenas from Spitzer’s office as part of the inquiry.
Canary on Wednesday agreed to return $30 million in profits and pay a $10 million fine to settle a civil complaint of illegal trading practices.
Bloomberg News contributed to this report.
