Strong resigns, funds probed

matt.nash@marquette.edu

Investigations continue into alleged improper trading practices of Richard Strong, chairman of Menomonee Falls-based Strong Financial Corp., according to Kathryn Carlson, spokeswoman for the Wisconsin Department of Financial Institutions. Strong, who is being investigated for trading practices dealing with mutual funds, resigned from his position as chairman of the independent board of directors Sunday.

The driving force behind this investigation, however, is New York Attorney General Eliot Spitzer. According to Milwaukee Journal Sentinel reports, Spitzer began an investigation into the mutual-fund industry last month.

Marc Violette, a spokesman for Spitzer, said, based on information Spitzer has received, Strong is being investigated in relation to market timing.

“Mr. Spitzer has said that more than likely there will be charges brought against the company,” Violette said.

Market timing, Violette said, is not an illegal practice. It is a practice in which the investor makes very rapid movement in and out of a mutual fund, he said.

However, mutual funds are designed and usually marketed as long-term investments. Investors do not typically buy and sell mutual funds rapidly. In fact, Violette said, most investment firms clearly express market timing as a practice the firm does not use.

When a firm then uses market timing after expressing otherwise, the firm is guilty of fraud, he said. Violette said market timing is also related to other illegal trading practices. He said regular investors usually do not practice market timing. Rather, market timing is usually the result of an investor acting on inside information.

Violette said market timing goes against the ideal of investment firms working in the best interest of their investors because it dilutes the profit pool, taking money from average mutual fund investors.

“It’s difficult to calculate how much (a firm’s) market timing hurts (an investor) individually,” Violette said.

According to Strong Financial’s Web site, the firm does suggests market timing is not the best way to manage an account, but the Web site does not say whether the firm does or does not practice it. Corporation spokespeople declined to comment.

Violette said there was a possibility of criminal charges in this case.