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The Honolulu Advertiser

Posted on: Friday, December 5, 2003

Investors yank $2 billion from firm

By Carrie Antlfinger
Associated Press

MILWAUKEE — Worried investors pulled nearly $2 billion from mutual funds managed by Strong Financial Corp. in November — more than twice as much as during the previous two months — amid state and federal investigations into its trading activities.

It was the third month in a row that investors withdrew from taxable bond funds, money market funds, municipal bond funds and equity funds managed by Menom-onee Falls-based Strong.

Investors pulled out a total of $908.9 million in September and October and just under $2 billion in November. Word of an investigation came in September. The month before that, investors put $150.8 million into the funds.

"It doesn't look good for Strong," said Robert Adler, president of AMG Data Services, of Arcata, Calif., which compiles the weekly company-by-company flow figures for the industry. "This is not an investor reaction. This is more likely a considered investor response."

He said other companies not involved in the investigation of the mutual fund industry did not have such high outflows.

Calls to Strong representatives were not immediately returned yesterday.

The company's founder, Richard Strong, resigned Tuesday as chairman, chief executive and chief investment officer. He also left his positions on the boards of directors at Strong Financial and Strong Mutual Funds and said he would divest himself of voting control.

Strong, who admits no wrong-doing, owns about 85 percent of the company. The company said Wednesday that it hired Goldman Sachs to find buyers for the firm, which Strong founded in 1974. The company manages about $42.7 billion in assets.

The Securities and Exchange Commission, the attorney general of New York state, and the Wisconsin Department of Financial Institutions are investigating Strong and the firm.

The company has acknowledged Strong engaged in some next-day transactions in his personal accounts, as well as those of friends and family. Those transactions are estimated to have yielded as much as $600,000.

Investigators looking at the mutual fund industry 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 it is fraudulent for a fund to allow selective market-timing without disclosing that to shareholders.

In other industry developments:

• The SEC filed a civil fraud complaint against Mutuals.com, accusing it of late trading and market timing.

The complaint named CEO Richard Sapio, 37, President Eric McDonald, 35, and compliance officer Michele Leftwich, 35, as well as two affiliated broker-dealers.

Stephen Topetzes, a lawyer for Mutuals.com and the three executives, says that his clients have been cooperating with the agency and had hoped to resolve the matter before a complaint was filed.

• Assets of the nation's retail money market mutual funds fell by $1.74 billion in the latest week to $927.82 billion, the Investment Company Institute said.

USA Today contributed to this report.