In a shocking twist to the nation’s growing mutual fund scandal, New York Attorney General Eliot Spitzer is weighing the possibility of charging the founder and chairman of mutual fund operator Strong Financial with defrauding investors, sources close to the investigation say.
Richard Strong is suspected of routinely using his Milwaukee-based fund company the USA’s 32nd largest, with $43 billion under management to personally profit at investors’ expense.
During a five-year period ending in 2002, trading records subpoenaed by Spitzer’s office suggest Strong made at least $600,000 for himself and friends and family by engaging in rapid, market-timed trading designed to exploit inefficiencies in funds that specialize in small and midsize companies.
Though such activity is not illegal, Strong and most other funds discourage it in their prospectuses because it allows timers to make money while diluting the value of long-term investors’ shares. In some cases, investigators believe, Strong who is fond of saying “the client comes first at all costs” and ranks 318th on Forbes magazine’s list of richest Americans profited while other investors lost money.
The allegations, the first involving the chairman and founder of a mutual fund firm, are sure to further roil 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.
“What has emerged is one of the most scurrilous stories we have seen,” Spitzer said in an interview. “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.” Eight weeks ago, Spitzer triggered the state and federal investigations into improper and illegal trading activities.
Strong Financial released a statement Wednesday night: “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.”
People close to the situation say prosecutors are weighing possible inside trading charges against Strong. Investigators believe he may have used knowledge of his firm’s trading positions to market-time funds not monitored by internal compliance officers.
Strong has been in trouble with regulators before for improper trading. His funds’ performance has suffered in recent years amid heavy fund manager turnover.