The chairman of Strong Financial Corp. is under scrutiny as part of an investigation into improper trading at the company, a source familiar with the matter said Wednesday.
New York Attorney General Eliot Spitzer is investigating whether Richard S. Strong, who also founded the company, made improper trades that benefited himself and his friends and family, said the source who spoke on condition of anonymity.
The source said Spitzer is considering charges against Strong and his company, and the investigation is continuing.
Spitzer declined to comment, as did the Securities and Exchange Commission which is also looking into mutual fund trading as part of a widening probe that has so far resulted in dozens of fund companies being subpoenaed and two guilty pleas from individuals involved in trading.
Strong Financial issued a brief statement Wednesday saying it was cooperating with regulators and conducting an internal review, but a spokeswoman had no further comment on Richard Strong’s involvement.
The source said investigators are focusing on so-called market-timing transactions, in which short-term, in-and-out trades are used to capitalize on market-moving news. The process is not illegal, but many fund companies including Strong have policies against it because it increases costs and hurts long-term shareholders. Regulators have indicated that it is fraudulent for a fund to allow selective market-timing without disclosing that to shareholders.
Investigators had previously indicated they were looking at the Menomonee Falls, Wis.-based company.
Earlier this year, Spitzer subpoenaed Strong’s records and referenced the company in a complaint filed against hedge fund operator Canary Capital for illegal fund trading. Canary paid $40 million to settle the charges.
According to the Canary complaint, Strong agreed to allow Canary to market-time five of its funds in exchange for Canary opening an $18 million brokerage account.
At least one of the Strong funds offered to Canary had a prospectus implying market timing was forbidden, the complaint contends.
Although Spitzer’s office would not comment on Strong, the attorney general has accused a former broker at Bank of America, one of the other companies mentioned in the Canary complaint, of fraud.
Additionally, a former hedge fund trader at Millennium Partners and a former Fred Alger & Co. executive have pleaded guilty to fund-related wrongdoing as part of the expanded investigations.
So far no criminal charges have been filed against companies. On Tuesday, the SEC and the state of Massachusetts took civil action against Boston-based Putnam Investments, accusing the company of defrauding the public by allowing market-timing trading in some of its funds.
Two former Putnam managers were also named for allegedly market-timing their own funds with money from their own personal accounts. Putnam has denied any wrongdoing.
Privately held Strong Financial manages roughly $42.7 billion in assets. Strong’s biggest fund, the Strong Opportunity Fund, has $2.9 billion in assets.
Also Wednesday, there were new indications the investigation into mutual fund trading was expanding further.
The brokerage industry’s self-policing organization is investigating more than 30 firms in connection with mutual fund trading abuses, a source familiar with the situation said.
The National Association of Securities Dealers is examining the firms as part of the industrywide review of trading practices, and the 30 or so firms targeted may only be the first wave for the NASD, the source said on condition of anonymity, confirming a Washington Post report.
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