Oct. 31–Investment company Strong Financial Corp. responded Thursday to allegations of improper trading against its founder and chairman, Richard S. Strong, with a statement acknowledging thatStrong actively traded his own money and that of his friends and family in company funds.

“Although Mr. Strong does not believe that his transactions were disruptive to the funds, he has committed to personally compensate the funds for any financial losses that the funds may have experienced as a result of those transactions,” the statement reads.

It goes on to quote Strong himself, who says, “If it becomes appropriate, I would be prepared to step aside to enable new leadership to bring new energies to this company.”

The statement followed allegations Wednesday by New York Attorney General Eliot Spitzer, who said that Strong was among the targets of his agency’s investigation into improper trading in funds managed by the Menomonee Falls-based company. On Thursday, a spokesman for Spitzer’s office said the agency was likely to take action against Richard Strong in the case.

“It looks like the investigation is taking us in that direction,” said Brad Maione. “What we’re seeing is proof that there’s two sets of rules — one for insiders and one for individual investors.”

The allegations against Strong Financial and its affiliates date to a Sept. 3 complaint by Spitzer’s office. The complaint, made against Canary Capital Partners, alleged that Strong allowed the New Jersey hedge fund to engage in short-term trading, or market timing, in Strong funds, harming long-term investors.

Through market timing, speculators can take advantage of inaccuracies in the way mutual fund shares are priced to buy shares at less than their true value and then sell them when they rise to that value. Though market timing is not illegal, Spitzer’s office suggested Strong Financial might have committed fraud by distributing legal documents to investors that gave the impression the company would discourage timing practices.

“Strong’s (documents) gave investors no warning that their funds would be used for timing, but rather created the misleading impression that Strong identified and barred timers from its funds,” Spitzer’s Sept. 3 complaint reads.

Spitzer’s latest allegations are even more serious. The attorney general said that company employees and Strong Wisconsin’s sixth richest man with $800 million in assets, according to Forbes magazine had enriched themselves at the expense of long-term investors.

Spitzer’s allegations contrasted with a statement made by Richard Strong on Sept 26.

“We are not aware of any other arrangement at Strong similar to the former arrangement with Canary,” that statement said.

But in Thursday’s statement, Strong Financial said “a small number” of Richard Strong’s trades were next-day transactions. In the Sept. 3 complaint, Spitzer’s office gave an example in which next-day trades could be used as part of a market-timing strategy. (See chart.)

An analyst who covers Strong mutual funds said he was troubled by the revelations.

“It’s shocking and disturbing that this goes on,” said Paul Herbert of Chicago-based Morningstar.

As part of its statement Thursday, Strong Financial said it would change company practices, putting into place safeguards against improper trading and giving independent directors a majority on parent company Strong Financial’s board. The company also has engaged former SEC Chairman David Ruder and Richard Andersen, former supervisory examiner for the SEC’s Midwest regional office, to review policies and procedures.

A statement by the five independent directors of the Strong funds, made the same day, said the board was investigating the allegations of improper trading at the company.

The Wisconsin Department of Financial Institutions also acknowledged that the agency was investigating whether any of the trading at Strong had violated state securities laws.

“Because it’s an ongoing investigation, I cannot comment on any of the details of it,” said Kathryn Carlson, a spokeswoman for the department.

Carlson said her office is sharing information with the Wisconsin Attorney General’s office. Neither office would comment on whether the state attorney general is actively investigating.

Strong Financial has also disclosed that it is under investigation by the U.S. Securities and Exchange Commission, which declined comment.

State Treasurer Jack Voight said his office has hired an attorney and would take action to protect investors in EdVest and related state college savings programs, which are managed by Strong Financial. Voight said he was calling an emergency meeting Monday of the state College Savings Program Board, which oversees the EdVest program.

Wisconsin college savings programs have almost $1 billion in assets under management by Strong. Around $182 million is invested in a Strong fund implicated in the allegations of market timing. In all, Strong Financial has about 1,300 employees and $42 billion in assets under management, including money invested in tax-deferred retirement plans for state workers.

Speaking of what effect the allegations might have on Strong Financial, analyst Paul Herbert said they would probably speed up the flight of some investors from the company’s investment funds.

“I do expect that to accelerate,” Herbert said.

Jack Voight said the allegations would bring the company under closer state scrutiny and might win new support for his proposal rejected last month by the college savings board to have an independent, state-run audit of the college savings programs managed by Strong.

“I think there’ll be more support to have steep oversight,” Voight said, adding that his office would be watching what actions state and federal regulators take next.

“I just wonder is this it or is there a lot more to come?” Voight asked.

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(c) 2003, The Wisconsin State Journal. Distributed by Knight Ridder/Tribune Business News.