May 20, 2004

Strong to Pay $60 Million in Mutual Fund Inquiry


Richard S. Strong, who helped fuel the extraordinary growth of mutual funds over the last three decades, has agreed to pay $60 million and be banned from the financial industry for life to end an investigation into improper trading, regulators announced today.

Mr. Strong, 62, is the most prominent figure to be ensnared in a sweeping investigation of improper trading in mutual funds that was begun last summer by Eliot Spitzer, the New York attorney general. Mr. Spitzer and other regulators have sued some of the nation's largest money managers, forcing several to reduce the fees charged to investors and pay steep penalties.

But Mr. Spitzer has long maintained that Mr. Strong's behavior stood out because he personally profited from the trading and because, as chief executive, he should have known better.

Over three decades, Mr. Strong built a small investment house into a mutual fund power, Strong Capital Management. Forbes magazine has estimated his personal wealth at $800 million. But it was a relatively small gain that resulted in his downfall.

Regulators say he made $1.6 million in profits on hundreds of short-term trades in Strong Capital mutual funds, even as the company's public filings indicated it discouraged such activity, regulators said today.

Mr. Spitzer had weighed bringing a criminal suit against Mr. Strong for the trading, and had convened a grand jury to consider the case. While Mr. Strong avoided criminal charges, he agreed to pay a $60 million fine — a large penalty in proportion to his trading profits, Mr. Spitzer said. The penalty is also the largest paid by any executive to date in regulators' investigation of mutual fund trades.

Mr. Strong also wrote a remarkable letter of contrition that was released by Mr. Spitzer's office.

"Throughout my career, I have considered it to be my sacred duty to protect my investors; and yet in a particular and persistent way I let them down," Mr. Strong wrote.

In addition to Mr. Spitzer, the Securities and Exchange Commission, the Wisconsin attorney general, the Department of Justice and the Wisconsin Department of Financial Institutions were all part of the settlement.

Under the terms of the settlement, Strong Capital has agreed to disgorge $40 million of profits and to pay a $40 million penalty. The firm, which manages $33 billion in assets, was accused of allowing some of its clients to engage in trading that hurt other investors, but that allowed Strong to obtain non-mutual fund business.

Through an agreement with the New York attorney general, Strong Capital said this afternoon that it has also agreed to reduce fees charged on its mutual funds by a total of about $35 million over the next five years.

The company, founded by Mr. Strong 30 years ago, added that all costs associated with the settlements will be paid by the management company, not investors in any of Strong's funds.

"These settlement agreements allow us to move forward and concentrate all of our energies on meeting the needs of our clients and delivering high-quality investment performance," Kenneth J. Wessels, chairman and chief executive of Strong, said in a statement.

The improper trading, which is known as market timing, dilutes gains for long-term shareholders and increases transaction costs.

Neither the company nor Mr. Strong had disclosed the improper trading to Strong Capital's directors or to its shareholders, the S.E.C. said.

"In fact, the Strong fund prospectuses and S.C.M.'s policies and practices created the misleading impression that frequent trading of the kind practiced" on behalf of some of its clients and by Mr. Strong "would not be allowed," the S.E.C. said.

Mr. Strong's personal behavior was particularly egregious, the S.E.C said.

"His personal trades were a betrayal of the highest order, warranting the stiffest possible civil sanctions," Stephen M. Cutler, director of the S.E.C.'s division of enforcement, said in a statement.

In addition to Mr. Strong, the S.E.C. also said that two other Strong executives had agreed to settle charges.

Anthony J. D'Amato, an executive vice president at Strong Capital Management, agreed to pay $750,000 in disgorgement and civil penalties. Mr. D'Amato was accused of approving the improper trading arrangement with certain Strong Capital clients.

And Thomas A. Hooker, Strong Capital's compliance officer, agreed to pay $50,000 in penalties for failing to ensure that such trading had stopped after he learned it was taking place.

Like Mr. Strong, both men agreed to a permanent ban from the mutual fund industry.

In December, Mr. Strong resigned as the company's chief executive, chairman and head of investments. Until the mutual fund scandal broke last fall, he routinely was included on Forbes magazine's list of the 400 richest Americans.

When Mr. Strong was implicated in trading activities to enrich himself, his friends and foes alike both wondered why he would take such risks for what comparatively is such a small amount of money.

In a story that was published last November, Mr. Strong told reporters from Fortune magazine, "I don't care about money."

Mr. Strong, who grew up in North Dakota, is no stranger to personal tragedy.

His father, a farm agent, died when he was 17. His mother died of leukemia six months later.

Shortly after Mr. Strong stepped down, Strong Capital retained Goldman Sachs to find a buyer for the firm. Analysts said that today's settlement removes a major impediment that had been standing in the way of a deal.

Since its name surfaced in the mutual fund scandal, Strong Capital's assets under management have dropped by more than 20 percent.

In a complaint, Mr. Spitzer filed last September against Canary Capital Partners LLC, a New Jersey hedge fund, Strong Capital was one of four firms named by Mr. Spitzer that allowed Canary to engage in improper trading.

According to Mr. Spitzer's complaint, Strong officials "regularly provided Canary with detailed breakdowns of the portfolios of its target funds. These allowed Canary to sell short the stocks the portfolios contained."

Strong is the third of the original four firms named by Mr. Spitzer to face civil action.

Bank of America Corporation agreed to settle with Mr. Spitzer and the S.E.C. for a total of $675 million in fines and management fee cuts. Janus Capital Group Inc. settled with federal, New York and Colorado authorities for $226 million.

The fourth firm, Bank One Corporation, has yet to face civil enforcement action.

The executives who led the companies or investment divisions no longer hold their jobs.

Since the mutual fund investigation began, one other executive has been banned for life from the securities industry. Two others have been suspended.

James Connelly, former vice chairman of Fred Alger Management Inc., was banned for life from working for a brokerage or advisory company. Currently, he is serving a sentence of up to three years in a New York jail.

John Ballen and Kevin Parke, who respectively were chief executive and head of investments at MFS Investment Management, were fined by the S.E.C. and suspended for six and nine months, respectively. The two men were also fined and banned from serving as an officer or director of an asset management company for three years.

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