Milwaukee Journal Sentinel (Thomas Content)
Pages of detail spelling out Richard S. Strong’s participation in market timing will serve as a road map for class-action suits and other cases seeking to recoup money lost by investors in Strong mutual funds in recent years. Accounts of Strong’s trades were spelled out in the $175.8 million settlement announced last week by the Securities and Exchange Commission and New York and Wisconsin regulators.
Documents filed by the regulators “provide a nice, detailed road map for class action attorneys and arbitration attorneys,” said Andrew Stoltmann, an attorney preparing two arbitration claims against Strong on behalf of investors in Illinois and Wisconsin. “Anytime specific documents are referenced in a release like this, it helps tremendously in discovery in cases against Strong.”
Last week’s settlement, which includes a $60 million penalty against Richard Strong, won’t end the legal process against Strong. It just shifts the focus from regulators to trial lawyers representing investors.
How long the legal process will take is unclear, as is the amount that investors lost because of the scandal and the amount that Strong might end up paying once all the cases are decided.
“There’s no question that he’s going to get tagged for more money,” said Stoltmann. “It’s just a question of how much he’s going to get tagged for.”
Suits seeking class-action status are pending in federal court in Maryland and in state and federal court in Wisconsin. And arbitration lawyers are preparing claims on behalf of fund owners. Attorney Denise Schwartzman of Haverford, Pa., said it’s impossible to tell from Thursday’s settlement whether the restitution amounts negotiated with Strong and his firm will be sufficient to cover investors who are suing Strong in class-action suits.
“The amount of money that’s actually going to go toward restitution toward members of the class . . . is questionable, and how that relates to the actual damages suffered by those people has not been determined,” said attorney Jeffrey Klafter, who filed a class-action suit against Strong in Milwaukee County Circuit Court in 2003.
That suit is now pending in federal court in Milwaukee but could end up being shipped back to state court.
Last week, the SEC said investors would receive $140.8 million in reimbursement for losses through the fines and restitution payments negotiated in the settlement.
Investors who feel they were harmed by the scandal have an option of filing an arbitration complaint with the National Association of Securities Dealers or joining the class-action suits. Typically, an arbitration complaint generates a bigger return for shareholders – 50 cents on every dollar lost vs. 2 to 3 cents for a class-action case, Stoltmann said.
But the drawback to arbitration cases is that they require more active involvement on the part of investors because, unlike class-action cases, investors must put up a $1,400 filing fee in arbitration cases, he said.
Klafter said last week’s disclosures could result in additional defendants in class-action cases – some of Strong’s friends and relatives.
The order filed by the Securities and Exchange Commission on Thursday disclosed that from 1998 to 2001 and again in 2003, “Strong engaged in frequent trading of 10 Strong funds in 40 accounts that he managed for himself, family and friends.”
“We certainly would intend to proceed against those families and friends if our case were allowed to proceed in the Wisconsin courts,” Klafter said.
A Strong spokeswoman said the company doesn’t comment on pending litigation. But lawyers involved with the investigation said they expect Strong lawyers to emphasize that losses by mutual fund investors were part of the broader bear-market collapse of the last several years.
“Their attorneys are going to argue that the losses that were sustained in these funds weren’t the result of Dick Strong’s actions, but that it was the market that caused these funds to lose value,” Stoltmann said.
Hundreds of class-action cases against Strong and five other firms have been consolidated in federal court in Baltimore. Class-action suits are known to drag on for years, but the mutual fund cases were assigned to a three-judge panel to speed it along.