November 3, 2003
Strong Financial Chairman To Face SEC, State Charges: Wisconsin Also Joins Fray
New York Attorney General Eliot Spitzer announced last week he plans to formally charge Richard Strong, chairman and founder of Strong Financial, with using inside fund information to take $600,000 in market-timing profits in a number of his company's small- and mid-cap mutual funds between 1998 and 2001.
Strong, one of the four firms named in Spitzer's original suit against Canary Capital Partners, will also be charged along with at least one other executive.
Declining to say whether the charges will be criminal or civil, Spitzer said he would press them in conjunction with the Securities and Exchange Commission. An SEC press officer declined to comment further.
Meanwhile, regulators in Wisconsin, where Strong is based and runs the state's $1 billion 529 college savings plan, are also investigating the Menomonee Falls, Wis., firm. The state's department of financial institutions did not return a call at press time, but an SEC filing reveals the state is cooperating with New York and the SEC.
State Treasurer John C. Voight said last Thursday he is taking a measured approach: "[We should] be guarded right now because the fact is Spitzer hasn't made any specific charge against Dick Strong," Voight said. However, shortly after Spitzer's probe began on Sept. 3, Wisconsin stated it would charter an independent audit of its 529 plan, for which Strong has a five-year contract. The audit has not yet started, but under the circumstances, they may now hasten.
If charged, Chairman Strong would not only have the distinction of being one of the Forbes 400 richest people in America, worth $800 million, but he would be the first mutual fund CEO to be charged in the ongoing probe by Spitzer, the SEC and a growing number of state regulators. The CEO allegedly also permitted family and friends to market time funds in his firm, which he founded in 1974.
Also a first, Spitzer indicated that "there were a core of people at the top of the company who knew about this." He also promised he wouldn't allow any settlements with his office unless the fund industry undergoes extensive reform. Spitzer is scheduled to testify before the Senate government affairs subcommittee Monday.
"This is an outrage that should distress every mutual fund investor. What has emerged is one of the most scurrilous tales I've seen yet," Spitzer reportedly said. "If you ever wanted proof that there were two sets of rules - one for insiders and one for individual investors - this is it."
This isn't the first time Chairman Strong and his firm have had a run-in with the SEC. In 1994, the commission charged the executive with moving securities in his own mutual fund account at the same time Strong Funds was recommending those stocks to clients. Strong Funds, meanwhile, improperly moved stocks between various funds, the SEC charged. The firm settled the complaint, without admitting guilt, by paying $444,300 restitution to three of its funds.
Strong issued a statement last week saying it was cooperating with regulators and that independent auditor Deloitte & Touche was continuing its internal investigation.
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