Attorney General Eliot Spitzer is looking into allegations that Strong Financial head Richard Strong routinely used his fund company to personally profit at the expense of his investors. To support this contention, trading records subpoenaed by Spitzer’s office show a five-year period ending in 2002 suggesting that Strong made at least $600,000 for himself and friends and family by engaging in rapid, market-timed trading, according to a USA Today report.
Even though market timing – the rapid trading in and out of mutual funds to take advantage of inefficiencies in the market – is not illegal, per se, it is generally frowned upon across the industry. In fact, Strong and most other funds say in their prospectuses they discourage this activity because it allows timers to make money while diluting the value of long-term investors’ shares.
Strong’s case is particularly galling, as investigators believe he profited while other investors lost money. This has led investigators to also look at the possibility of insider trading charges against Strong, since they believe Strong may have used knowledge of his firm’s trading positions to market time funds not monitored by internal compliance officers.
“What has emerged is one of the most scurrilous stories we have seen,” Spitzer told USA Today. “The chairman was trading his own personal account to the detriment of his investors,” he added. “There will be charges. The nature of those charges will be determined in the very near term.”
In response, Strong Financial released a statement that said, “We are in the process of a thorough internal review. We don’t have more to say, other than that we are continuing to cooperate with regulatory agencies.”
The Strong allegations echo earlier allegations made at Putnam of four money managers –including its head of international investing – taking advantage of market timing in their personal accounts. Overall, the action by the money managers, along with two other Putnam employees, made profits of approximately $700,000 on the prohibited trades. The difference was that the market timing activities in question reportedly date back to 2000 – and have not reoccurred since Putnam detected – and stopped the activities some three years ago (See Market Timing Leads to “Late” Departure of Putnam Fund Managers ).
However, the major difference is that the Strong case is thefirst involving the chairman and founder of a mutual fund firm, which will almost surely further ruffle the feathers of the suddenly embattled the $7-trillion fund industry. Fund investors, who number more than 90 million, are pulling millions of dollars out of suspect funds as the scandal deepens. This comes after Spitzer triggered the state and federal investigations into improper and illegal trading activities eight weeks ago with his initial allegation tied to the hedge fund Canary Capital Partners (See Spitzer Fund Abuse Probe Pumps Out More Subpoenas).