If you have money in mutual funds - you may be getting a refund

It is possible to time the market - when you don't let anyone else time it, that is.

Wow, these guys are corrupt.
http://www.washingtonpost.com/wp-dyn/articles/A55027-2003Nov2.html

By Brooke A. Masters
Washington Post Staff Writer
Monday, November 3, 2003; Page A01


NEW YORK, Nov. 2 -- A quarter of the nation's largest brokerage houses helped clients trade mutual funds after hours, a practice that is illegal, a Securities and Exchange Commission survey has found.




The survey, to be disclosed at a Senate governmental affairs subcommittee hearing Monday, found that after-hours trading and other abuses were widespread in the $7 trillion mutual fund industry, shortchanging a majority of fund customers. Half of the 88 largest mutual fund companies had arrangements that allowed select customers to use a trading technique known as "market timing," a legal short-term trading strategy that exploits the fact that mutual fund prices are set once a day but stock prices change continually.

Most funds say they discourage these quick in-and-out trades by imposing high fees, but the survey found that some companies cut special deals with wealthy investors that may have violated disclosure rules.

Preliminary data also suggest that employees at 10 percent of the fund companies knew some customers were violating the rules against "late trading." And even fund companies that did not allow market timing may have been victimized because almost 30 percent of the brokers helped clients circumvent company rules against the practice.

The hearing Monday represents Congress's first crack at the two-month old mutual fund scandal. SEC enforcement director Stephen M. Cutler is to present the survey results in testimony Monday before the subcommittee. New York Attorney General Eliot L. Spitzer, who also is to appear before the subcommittee, said in an interview Sunday that he plans to use the occasion to call for major penalties to be imposed on the industry.

Spitzer, who launched the first mutual fund trading case in early September, said every mutual fund company that allowed improper trading should be forced to give back the management fees it received for the period when the improper trading occurred. Such a penalty could run into the billions of dollars.

"It's going to be big dollars and it should be big dollars," Spitzer said. "If you are being paid to act in the interest of investors and you violate that trust, you shouldn't be paid. We need to revitalize the governance of this industry so that the interest of the investor is paramount."

Spitzer's Sept. 3 civil complaint alleging that four major fund companies had cut secret deals with a New Jersey hedge fund has now sparked six state, federal and industry probes focused on late trading and market timing. The SEC then demanded information about both practices from the nation's 34 largest securities dealers and 88 largest fund companies, which manage $5.7 trillion of the industry's $7 trillion in assets.

The SEC launched the comprehensive survey in September and found that late trading was surprisingly common. A 1968 law requires fund customers who place orders after 4 p.m. to get the next day's price, but the SEC found that seven large brokerage houses out of 34 had allowed customers to place or cancel orders after that deadline, allowing them to illegally exploit news announced after the New York stock markets closed.

The NASD, an industry regulatory group, is surveying smaller brokers to see if similar problems occurred in their sector, and its enforcers have already opened 30 cases connected to either late trading or market timing, sources said.

In the SEC survey, about 70 percent of the brokers said they were aware that some of their customers were timing the market and 30 percent said their employees had helped clients carry out that task. Most mutual fund companies say they discourage market timing because of its costs to ordinary investors, who would otherwise get the profits that traders take.

The SEC also found that one-third of fund companies shared detailed information about their fund portfolios with favored customers. That selective disclosure may be illegal and certainly made it easier to engage in market timing and other improper trading.

Sen. Peter Fitzgerald (R-Ill.), who is to chair the hearing on Capitol Hill, "believes the results are troubling and they underscore the urgent need for significant reforms in the mutual fund industry," Fitzgerald's spokesman Dan Curry said.

A spokesman for the Investment Company Institute, the main mutual fund trade group, said Sunday he had not seen the survey results and could not comment.

But the Investment Company Institute had a harsh reaction to Spitzer's proposal for docking management fees. Those "fees are a mutual fund company's revenues, not its profits. . . . [That's] the money that pays lawyers and compliance officials and the staff. We thought the New York attorney general wanted to strengthen mutual funds, not cripple them," a spokesman said.

The institute last week called for a mandatory 2 percent fee on all short-term investments to discourage market timing and suggested the SEC require that all mutual fund orders be received by the fund company before 4 p.m. In the current scandal, some brokers submitted late orders and falsely claimed the orders were placed before 4 p.m.

Paul Roye, director of the SEC's division of Investment Management, said he could not comment on the survey or other enforcement activities. He said, however, that the commission is ready to make major changes in fund governance if that proves to be the best solution. The SEC already has come out in favor of having 66 percent, rather than half, of all directors be independent and would be open to the idea of requiring the board chairman to be independent, Roye said in an interview. "Nothing is off the table. We want a framework that doesn't allow these abuses to go on," he said.


© 2003 The Washington Post Company

 

http://www.usatoday.com/money/perfi/funds/2003-10-30-strong-cover_x.htm


Posted 10/30/2003 12:40 AM Updated 10/30/2003 7:38 AM


MUTUAL FUND SCANDALS

Strong founder may bow out amid fund scandal
By Elliot Blair Smith, USA TODAY
Mutual fund empire builder Richard Strong is expected to temporarily step down as early as Thursday from the $43 billion investment company that bears his name after allegedly profiting illegally from trades in his own funds, a source close to an investigation by the New York attorney general's office said Wednesday.

Richard Strong has been embroiled in the mutual fund trading scandal.
Via Milwaukee Journal Sentinel

Should the tall, powerfully built Strong, 61, remain true to form, he will drive swiftly away from the marquee headquarters he built at the edge of Milwaukee — he has a history of speeding tickets — but will continue to court risk as he has for most of his tumultuous career, now in its fourth decade.

New York Attorney General Eliot Spitzer is pursuing a possible criminal indictment against Strong for insider trading, a source close to the investigation said.

Strong Financial

Chairman, chief investment officer and founder: Richard Strong
Founded: 1974
Headquarters: Menomonee Falls, Wis.
Total assets: $42.7 billion*
Total funds: 61 stock and bond funds
Average domestic stock-fund rating: 3.1 (out of 5)
Average bond-fund rating from Morningstar: 3.1
Investors: About 460,000 households; 1 million active accounts
First funds: Strong Balanced Fund and Strong Large Cap Growth Fund
Largest fund: Strong Opportunity Fund, assets of $2.9 billion
Newest funds: Strong Minnesota Tax Free Fund; Strong Florida Municipal Money Market Fund
At a glance: Strong Financial advises about 61 stock, bond and cash-management mutual funds and administers 401(k) plans for employers and union groups. It also manages state 529 college savings plans for Wisconsin, Nevada and Oregon.

* as of Sept. 30; Sources: Strong Financial, Hoover's


Unclear is whether Strong's five dozen mutual funds could survive the permanent departure of its mercurial founder, chairman and chief investment officer who built the privately owned company into a financial powerhouse that invests the savings of 460,000 American households and the assets of hundreds of 401(k) retirement plans, pension plans and charitable trusts.

Wisconsin Treasurer Jack Voight, chairman of that state's nearly $1 billion college savings plan, which it entrusts to Strong, said he would call an emergency meeting of the plan's board and press for an independent audit of Strong's finances. "Investors need to be protected, and I will do whatever possible to protect those investments that are in jeopardy," he said.

Strong's entanglement in the widening regulatory probes of ethical misconduct and self-enrichment in the $7 trillion mutual fund industry represents a watershed moment. For decades, small investors and financial professionals shared in the industry's phenomenal growth. It was a profitable relationship built on trust. But as profits evaporated in the post-2000 bear market, so did the trust.

In September, New York Attorney General Eliot Spitzer filed a complaint implicating Strong and three other mutual fund companies in a range of suspect practices on behalf of billionaire Edward Stern and his private hedge fund, Canary Capital Partners. Stern's practice of illegal after-market trades combined with his arbitrage in time-sensitive funds skimmed quick profits at long-term investors' expense. Stern settled the complaint, without admitting or denying wrongdoing, by paying $40 million.

The New York attorney general also indicted a Bank of America broker, Ted Sihpol III, for allegedly facilitating the after-market trades for Canary. Sihpol denies wrongdoing. Other regulators — the Massachusetts attorney general's office, the Securities and Exchange Commission and the National Association of Securities Dealers — since had advanced the investigation into multiple industry practices. But Wednesday's allegations by the New York attorney general, though not yet formalized as a legal complaint, are the most stunning to date.

A source close to the New York investigation said Strong personally engaged in a form of arbitrage known as market timing in which he rapidly traded in and out of his mutual funds to profit on whipsawing changes in asset values before those funds could be repriced. The source estimated Strong's profits at $600,000 and possibly higher — a pittance for Wisconsin's richest man, who perennially appears on the Forbes 400 list of wealthiest Americans.

Strong's mutual fund prospectuses frown on, but do not strictly prohibit, the practice. Nevertheless, state and federal law holds that Strong, by virtue of his fiduciary relationship with his investors, must place their interests before his own.

In an interview, Spitzer said Strong defeated his company's internal controls on market timing by assigning company watchdogs to his larger funds while he traded in smaller funds. "If there was ever a case where there was one set of rules for the insiders and another set of rules for the smaller, regular investor, this is it," Spitzer said.

Strong spokeswoman Stephanie Truog said, "We are in the process of a thorough internal review with the assistance of outside professionals. Given that we are still in the midst of that process, we don't have more to say other than that we are continuing to cooperate with regulatory agencies."

Strong's internal review is being undertaken by auditors Deloitte Touche. The four independent directors of Strong's mutual funds also have retained counsel and are performing their own review. Two directors refused to comment for this story; two could not be reached. The directors' attorney was said by his secretary to be vacationing on an island in the Pacific Ocean. The Wisconsin Department of Financial Institutions also is investigating.

Jason Greene, a Georgia State University professor who studies market-timing practices, says Spitzer's allegations against Strong, combined with state and federal fraud cases filed Tuesday against Putnam Investments and two of its former managers, represent major blows to an industry that already was reeling.

"This and the Putnam case earlier this week — where you had the fund managers timing their own funds — certainly represent the next level of essentially violating the trust the shareholders have put in the managers," said Greene.

Mercer Bullard, a former SEC attorney who now leads a private reform group called Fund Democracy, says, "The industry's really on the ropes. It's unbelievable. If you could write a script for legislation in the mutual fund industry, this is it." Others say no law could have halted the perfidy of mutual fund insiders.

In an interview last month, the SEC's top mutual fund regulator, Paul Roye, said, "We're not in the boardroom. We're not there when they're making arrangements about whether they're going to allow late trading. We want to be there when people screw up and hold them accountable. But it's got to be us working with state regulators, working with the industry, working with people who want to do the right thing to surface the bad guys, the wrongdoers and minimize this activity. It's got to be a collective effort."

Strong's latest brush with trouble comes as no surprise to some of his former business associates.

"He's a guy who loves to push the envelope," says former partner William Corneliuson, who helped build the predecessor to today's Strong Capital and the Strong Mutual funds. Corneliuson left the firm after investigators for the SEC and Department of Labor uncovered hundreds of illegal trades Strong personally approved between pension plans he administered, in part to benefit himself, the government said.

A Labor source said Strong provided four dubious reasons for the illegal trades. One was that some of the junk bonds already had incurred substantial losses and he didn't want to expose the pension plan that owned them to additional losses. So he transferred the money-losing junk bonds to another plan.

The biggest loser in Strong's exercise was a pension plan associated with White Consolidated Industries in Cleveland that lost nearly $1 million in such trades, according to the Labor Department. The White plan later collapsed and was taken over by the Pension Benefit Guaranty Corp.

Strong and his company were censured by the Labor Department and ordered to repay more than 100 pension plans — including White — nearly $6 million for the illegal trades. The SEC also censured Strong, ordered restitution of $444,000 and temporarily prohibited the firm from taking on new clients. But Strong's keen intellect and indomitable will allowed him to rebuild the company bigger than ever.

Corneliuson says now, "I left a lot on the table, but I wasn't going to go through it again. And I felt there was a high probability I would go through it again, because this is his style of business."

Strong is known for provocative sayings as well as deeds, among them, "If I can get away with it, why not?" And: "This is a business, not a church." A real estate developer with whom Strong laid plans to build a major hotel next to his headquarters said that deal fell through after Strong noticed one of the developer's business associates had missed a belt loop.

Chicago developer Thomas Kelly says Strong aide Bruce Behling informed him when the associate fell into disfavor. "Dick noticed that he missed a belt loop, and Dick doesn't know if that's the kind of guy he wants as part of the project," Kelly recounts Behling telling him. Kelly is suing Strong for abandoning the project.

Outward signs that something was amiss at Strong might have been apparent as early as June. That's when one of Strong's most trusted money managers, Ron Ognar, unexpectedly quit after a decade of working for a boss who will tell newcomers to "find a new line of work" if they displease him or "come back to me when you know what you're talking about." Ognar, who did not return a call for comment, managed four of five funds Spitzer identified as having been "timed" by Canary: Strong Growth 20, Strong Growth, Large Cap Growth and a Strong Advisor fund. But peril always is evident at Strong, whose glass campus offices are now a window on industry turmoil.

A Strong investment brochure prepared for institutional clients contains disclosures far more sweeping and potentially more troubling than the carefully hedged disclosures in its mutual fund prospectuses. There, Strong acknowledges engaging in many practices the SEC identifies as legal but rife with abuse: receiving payments and discounts from brokerages for processing trades; accepting stock prices above the market price in exchange for research and other benefits; and allocating "hot" IPO stocks to high-fees-paying hedge fund investors rather than to mutual fund clients.

Strong also acknowledges providing portfolio information to some investors more frequently than most, a practice that facilitates market timing and was singled out in Spitzer's September complaint.

In a Sept. 26 letter to clients, Strong said "it was not believed" that market-timing transactions with Canary "would be disruptive, nor were they ever identified by the portfolio managers as being disruptive." The letter added, "We are not aware of any other arrangement at Strong similar to the former arrangement with Canary." Such an assertion now is suspect, in light of Spitzer's allegations that Strong himself participated in the trades.

Strong mutual fund investor Rhonda Frank-Loron, a part-time attorney in Madison, Wis., says, "I feel like they're speaking out of both sides of their mouth."

Contributing: Thor Valdmanis


© Copyright 2003 USA TODAY, a division of Gannett Co. Inc.