Strong Funds' CEO, namesake, and founder Richard Strong has resigned. Strong Funds is a mutual fund company. Mr. Strong resigned because of allegations he engaged in illegal/unethical trading practices in his own mutual funds for personal benefit. This hits home for me as I own shares in six different Strong mutual funds.

Mutual funds are supposed to allow investors to purchase an ownership stake in a diversified portfolio of stocks, bonds, or other assets. Management of the assets is left to the fund company, thus leaving investors free from the worries and incredible risks involved in buying individual stocks or bonds. That's true as long as the funds are managed responsibly. Richard Strong betrayed the trust of his own shareholders. According to USA Today:

Investigators are focusing on market-timing transactions, in which short-term, in-and-out trades are used to take advantage of 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.

Last week, the company confirmed that Strong invested assets of certain trusts and other accounts in funds managed by his company, with himself and friends and relatives as beneficiaries, and over the years a small number were next-day transactions.

If this is mumbo-jumbo to you, let me explain. Generally, investment pundits discourage short-term trading, also known as "market timing." For one thing, it can be very dangerous. Stock prices are very volatile. Trying to take advantage of short-term movements in stock prices is risky because a stock price is just about as likely to drop as it is to rise. Whenever someone -- be it an individual or mutual fund -- purchases or sells a stock, they are charged a commission. Whenever one sell's a stock and makes a profit, taxes must be paid on that profit. IRS rules make taxes higher for short-term profits than they are for long-term profits. Most of the time, one is better off buying a good stock and holding it for a long time. That way, taxes and trading costs stay lower, and one is more likely to make a better profit.

Indeed, all of Strong's mutual fund managers have rules to discourage short-term trading. If they find that an individual investor is trading their mutual funds, they will label you as a "market timer," suspend your trading priviledges, and/or charge you extra fees:

The fund will consider the following factors to identify market timers: shareholders who have (1) requested an exchange out of the fund within 30 days of an earlier exchange request, (2) exchanged shares out of a fund more than twice in a claendar quarter...

But there still are instances when short-term trading can be profitable. If you are an individual investor, you can get lucky with a couple of short-term trades. Believe me; I've learned the hard way; it ain't easy. Short-term trading is generally best left to market experts who have access to the best trading tools, news, and other information. Experience counts a lot. That is, if you're ethical.

For me as a Strong fund investor, it is impossible for me to trade any of my mutual funds before or after the market closes. The various stock markets (NASDAQ, NYSE, AMEX) generally allow trading in individual stocks from 9:30AM to 4PM, Monday through Friday.[1] While some mutual funds can be traded like individual stocks on an exchange, none of my Strong funds allow this.

So why would someone want to trade before or after the market opens or closes? News, plain and simple. Companies listed on stock exchanges are generally required by the Securities and Exchange Commission (SEC) to release news only before or after the market opens or closes, so as to prevent excessive stock price movements during regular trading hours.[2] But Richard Strong took advantage of these rules.

Ol' Dicky-boy violated the rules of his own mutual funds and possibly violated SEC regulations. He engaged in short-term trading when me and the rest of Strong's customers would've been penalized and/or suspended:

It's believed that Richard Strong starting trading his own funds five years ago and made about two dozen trades a year (most in and out trades only spanning a couple days). It appears that his strategy involved buying fund shares when the market would rise, betting that the values of the small-cap and midcap stocks in those portfolios would take a few days to catch up with the rest of the market, then gradually sell the shares.

Strong Funds manages about $42 billion in assets. You know that Dicky-boy was getting a good salary and is loaded. This was just greed, plain and simple, and a violation of shareholder trust. I'm glad Strong resigned. He should've resigned earlier. Slowly but surely, the U.S. stock markets are recovering from the "bubble" of 2000-2001. The wheels of justice are catching up with the corporate wrong-doers. Sometimes, these scandals hit close to home. Live and learn.

For more information on the "bubble's" corporate scandals, click below:

• WorldCom & Enron: Wheels of Justice Turn Slowly
• Wheels of Justice Will Catch Ken Lay (Enron)
• Are You Invested in a Mutual Fund Now Being Investigated?