Fund Firm’s Founder Resigns

Richard S. Strong resigned Sunday as chairman of the mutual fund company he founded nearly 30 years ago, becoming the highest-profile fund officer so far to step down amid a deepening industry scandal.

Strong’s move came a few days after New York Atty. Gen. Eliot Spitzer said he might bring criminal charges against the 61-year-old executive involving alleged improper trading in shares of funds managed by Strong Capital Management Inc.

The Menomonee Falls, Wis.-based Strong company was one of four fund firms named by Spitzer in the Sept. 3 court complaint that sparked the industry’s worst crisis in decades. Spitzer said the companies in recent years allowed a favored investor, Canary Capital Partners, to engage in trading games with fund shares that cheated average investors.

Since Spitzer’s initial salvo, his investigation and tandem probes by the Securities and Exchange Commission and the state of Massachusetts have broadened to include many more fund firms, raising troubling questions about the industry’s practices and threatening to damage its image with the 95 million fund shareholders.

Both the House and Senate this week are set to hold hearings on the industry.

On Sunday, a statement from the five independent directors of the Strong mutual funds said they accepted Richard Strong’s resignation as chairman of the funds, and would begin a search for an independent president of the portfolios.

The company offers more than 50 stock, bond and money market funds with total assets of about $28 billion across 1 million accounts.

But the directors said Strong’s resignation as chairman of the funds didn’t affect his role as head of Strong Capital Management, which manages the portfolios under contract with the board.

Roy Weitz, an industry watchdog from Tarzana who operates the FundAlarm.com Web site, called Richard Strong’s departure as fund chairman “a sort of token resignation” if he remains in charge of the management company.

“Everything he could have done a week ago to exploit the funds, he’s still in a position to do now,” Weitz said.

Richard Strong could not be reached for comment Sunday.

Spitzer last week disclosed that the executive had in recent years engaged in short-term “market timing” trades of shares of certain Strong funds for his personal accounts.

Though such trading isn’t illegal on its face, a fund company can be charged with securities fraud if it permits the activity for favored investors while publicly discouraging average investors from the practice.

Spitzer’s investigation of the industry, and the probes by the SEC and Massachusetts, have centered on market timing of fund shares by certain investors and by some fund managers. The activity can hurt long-term investors in mutual funds by raising the portfolios’ trading costs and by siphoning away profits from buy-and-hold investors.

Last week, Boston-based Putnam Investments, the fifth-largest U.S. fund firm, became the first fund company charged with securities fraud for allegedly allowing market timing trades.

The SEC and Massachusetts both brought actions against the company.

In response, Putnam said it tried to stop market timing by investors and managers but was unable to halt the practice entirely. But the firm said it wasn’t guilty of fraud and received no financial benefit from the alleged actions of the traders.

In his initial complaint, Spitzer said Strong Capital, Bank of America Corp., Bank One Corp. and Janus Capital Group Inc. allowed Canary Capital to engage in illegal or improper mutual fund trading in return for bringing other fee-generating business to the firms.

Spitzer so far hasn’t formally charged the fund companies with wrongdoing, though he has warned that his investigation has become far-reaching.

A number of executives at Bank of America and Bank One have been fired in the wake of Spitzer’s probe.

But none are as well known to the public as Richard Strong, who has cultivated a folksy Midwestern image with shareholders but is considered a hard-charging competitor by industry rivals.

Strong, who ranks among Forbes magazine’s 400 wealthiest Americans with a net worth estimated at about $800 million, has been something of a hero in Wisconsin for building up a financial services giant in a state better known for farming and heavy industry.

Strong Capital said last week that Richard Strong did not believe his trading was “disruptive” to the funds, but that he would reimburse the funds for any resultant losses.