Richard S. Strong, chairman and founder of Strong Financial
Corp., has stepped down from the independent board that oversees his
company's mutual funds and more developments are likely this week,
officials said.
In a statement issued Sunday afternoon, the five independent
directors of the Strong mutual funds said they had accepted Strong's
resignation as chairman of the funds' board. However, his
resignation from the funds' board does not affect his role as
chairman and chief investment officer of Strong Capital Management,
which provides investment services to the funds.
Strong's decision to step down from the funds' board follows a
statement last week by New York Attorney General Eliot Spitzer that
he expects to charge Strong in connection with improper trades in
his own funds. According to The New York Times, Strong may have
gained as much as $600,0000 from activities including a "small
number" of next-day trades he has conceded to.
On Sunday, Juanita Scarlett, a spokeswoman for Spitzer's office,
called Strong's resignation from the independent board "inadequate,"
since he is retaining his other titles.
Stanley Kritzik, one of the independent directors of the funds,
said the board has started to search for an independent president to
oversee the funds' management and work closely with David Ruder, a
former Securities and Exchange Commission chairman who has been
retained by the Strong organization to review the company's policies
and procedures.
The independent board oversees the funds' contract with Strong
Capital Management, under which Strong Capital provides professional
management, investment advice, bookkeeping and other services to the
funds. Kritzik said he and the other independent directors, who are
elected by shareholders of the funds, are responsible for ensuring
the one-year contract with Strong is beneficial to shareholders.
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"Every year, we have a lengthy procedure to review the terms and
conditions of what is called the advisory agreement" with Strong,
Kritzik said Sunday. "One of the tasks that we're charged with is
seeing how well these funds are doing."
The independent directors have faced criticism from shareholder
groups for waiting until last week to announce their own
investigation into the trading at Strong. The independent directors
might have been quicker and more effective in their defense of
shareholders' interests if they weren't responsible for so many
Strong funds, Morningstar analyst Paul Herbert said Thursday.
The directors oversee 71 company funds, according to Strong's Web
site and documents filed with federal regulators.
"They're stretched too thin," Herbert said.
In their statement Sunday, the independent directors said they
are continuing their examination and "intend to take all steps
necessary to protect the interests of shareholders."
Other investigations also are proceeding. Lorrie Keating
Heinemann, secretary of the state Department of Financial
Institutions, said state officials are working closely with the U.S.
Securities and Exchange Commission, "which is moving quite quickly
on this case."
"It would be likely that you would see further discussions in the
next week," Heinemann said Sunday.
Strong spokeswoman Stephanie Truog declined to comment on
Strong's decision to step down from the funds' board.Today,
officials with the Wisconsin College Savings Program board will meet
in Madison with a newly-hired attorney to discuss how to respond to
the latest allegations about Strong. Strong, of Menomonee Falls, has
the sole contract to administer EdVest and other state college
savings programs and investors have some $759 million invested in
those programs in Strong funds.
Attorney General Peg Lautenschlager said her office has declined
a request by the state treasurer to represent the college savings
program in a possible case against Strong.
"We were reluctant to take on the obligation of representing
EdVest in a possible civil case, knowing that it would preclude us
from involvement in any possible criminal matter that might arise,"
Lautenschlager said.
While federal officials bear responsibility for investment firms
with more than $25 million under management, the state has
jurisdiction over registered investment advisers and
representatives, Heinemann said. The state also can pursue fraud
cases.
"We're looking to make sure that what's represented in the
prospectus is true of what's being offered to investors," she said.
Strong is one of at least a dozen mutual fund companies under
scrutiny nationwide. Although the results of the various
investigations remain unclear, the accusations against the industry
erode investor confidence, said Werner De Bondt, Richard Driehaus
professor of finance with DePaul University in Chicago.
"Millions of people have put their trust in mutual fund managers
.
There is no doubt that they have a fiduciary duty," De Bondt
said. "The real worry from the standpoint of the economic system is
that if people lose their trust in the system, there would be less
saving and less investment. .
It basically withdraws capital from the corporate sector."