Strong Confirms Market-Timing, But Denies Impact

September 29, 2003 ( - Strong Capital Management on Friday confirmed that a hedge fund engaged in market-timing trades with its funds, but said it doesn't believe the impact was "disruptive."

However, the  statement by Chairman Richard S. Strong stressed that Canary engaged in market-timing trades, not illegal late trades. Strong also said that over 6 1/2 months, its fund managers did not consider Canary trades to be “disruptive.”   In fact, Strong adds that the four growth funds have “traditionally had high portfolio turnover as part of their investment strategy” – a strategy that Strong says was outlined in their prospectuses.   Strong also noted that it was not aware of “any other arrangement at Strong similar to the former arrangement with Canary.”

Four “Score”

Strong was one of four funds cited by New York state Attorney General Eliot Spitzer on September 3 when he disclosed that hedge fund Canary Capital Partners had obtained special trading opportunities with Strong, Bank of America’s Nations Funds, Banc One, and Janus.   Spitzer, the US Securities and Exchange Commission, and state regulators in at least two states are all investigating (See  Spitzer Fund Abuse Probe Pumps Out More Subpoenas ).   Canary, in a settlement with Spitzer, agreed to pay a $40 million penalty, while admitting no wrongdoing.

In a statement posted on its Web site Friday, Strong said Canary traded in four of its funds and confirmed that three months after its initial transactions, Canary invested $500,000 in a Strong-affiliated hedge fund.   The four funds involved were:

  • Advisor Mid Cap Growth,
  • Growth,
  • Growth 20,
  • Large Cap Growth

Notwithstanding its current assurances, Strong said that fund investors will be reimbursed if the company determines that they suffered adversely in the four funds in which Canary traded.

“Fraudulent” Allegations

None of the fund companies has yet been charged with any wrongdoing; however, two types of trading violations were tagged “fraudulent” by the  Spitzer complaint :   Late trading, or buying mutual-fund shares after the market close at that day’s closing price; and timing, which involves taking advantage of market-moving events after the close of the market, when the funds’ daily price is set based on the net-asset value of the portfolio (see  Morningstar Cautions Investors in Wake of Canary Scandal ).

Also tainted by its inclusion in the Spitzer complaint was Phoenix-based Security Trust.   However, earlier this month STC CEO Grant Seeger noted that Canary officials had given his firm “written assurance” that Canary had received trade instructions before market close.”   As for the market timing charges, Seeger said STC knew Canary was carrying out market timing trades, but pointed out that the practice “while discouraged, is not illegal” (see  STC: Canary Trades Didn’t Harm Other Clients ).

Strong’s letter is online at