Mutual fund giant may step down amid scandal

By Elliot Blair Smith
USA Today

Under threat of a criminal indictment by the New York attorney general's office for illegally profiting on trades in his mutual funds, financial empire-builder Richard Strong may temporarily step down as early as today from the $43 billion investment company that bears his name, a source close to the investigation said yesterday.

Should Strong, 61, leave the marquee headquarters he built at the edge of Milwaukee he will continue to face risk, just as he has for most of his tumultuous career, now in its fourth decade.

Unclear is whether Strong's 61 mutual funds could survive the permanent departure of its mercurial founder, chairman and chief investment officer, who built the privately owned company into a Midwestern 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 personal entanglement in the widening regulatory probes of ethical misconduct and self-enrichment in the $7 trillion mutual fund industry represents a watershed moment in the now-troubled relationship between small investors and mutual fund money managers. For decades, 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.

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 temporary inefficiencies in fund prices.

The source estimated Strong's profits at about $600,000 — a pittance for a man who perennially appears on the Forbes 400 list of wealthiest Americans.

"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," New York Attorney General Eliot Spitzer said.