Report: Empire State Grand Jury Ponders Strong Trading

January 30, 2004 ( - Criminal charges against Richard Strong, founder of Strong Capital Management, may soon be forthcoming from a New York state grand jury that has been hearing evidence for several weeks, the New York Times reported.

According to the Times sources, grand jurors have been considering evidence presented by New York Attorney General Eliot Spitzer about Strong’s short-term trades in mutual funds his company managed.

Strong resigned in December as chairman of the company that manages the Strong funds and hired Goldman Sachs to solicit bids for the business (See   Retirement Plan Changes on Tap at Strong ). Early this month, about a dozen potential bidders signaled their interest in Strong Capital, which had $37.6 billion under management at the end of last year. The investigation has cast a cloud over Strong’s attempts to sell his majority stake in the company.

Spitzer said in October 2003 that Strong made such trades in his own account and accounts for family and friends even though fund documents indicated that the company discouraged the practice (See  Trading Probes Muscle Out Strong, Putnam Chiefs ). Strong, whose worth has been estimated at $800 million by Forbes magazine, made about $600,000 on the trades, the unidentified Times sources reported. The trading occurred from 1998 until at least 2001, these people said.

Strong’s lawyer, Stanley Arkin, told the Times that his client had done nothing wrong and questioned Spitzer’s right to pursue a case against him. “Our position has been and continues to be that there’s no way there was any crime committed,” Arkin said. “There is no way he has any jurisdiction over Strong.”

Even though Strong’s company is based in Menomonee Falls, Wisconsin, Spitzer is pursuing the case – along with other suits involving mutual fund companies nationwide – based on the Martin Act, a New York securities law dating to 1921 that he used in his previous pursuit of conflicts among stock analysts.

Regulators, including Spitzer the US Securities and Exchange Commission have argued that fund managers violated their fiduciary duty to investors by permitting such trading by a select few even as they indicated in their prospectuses that they discouraged the practice.