Strong, Firm to Pay $175 Million
Mutual fund company Strong Capital Management Co. and its founder, Richard Strong, agreed to a $175-million settlement Thursday to resolve securities fraud charges involving improper trading of mutual funds, state and federal regulators said.
The settlement, the latest in a year-old investigation of the fund industry, stands out because of the size of the penalty imposed on a single executive: Richard Strong will pay $60 million in fines and disgorgement, the largest of any individual in the probe so far.
In addition, the 62-year-old Strong issued a public apology -- unusual for securities-fraud settlements, which typically don’t involve admissions or denials of guilt. Strong and two other company executives also were permanently barred from the securities business.
“The size of the payment made by Richard Strong reflects the magnitude of the breach of trust he made as chairman and chief executive of the company,” New York Atty. Gen. Eliot Spitzer said.
His office negotiated the agreement along with the state of Wisconsin and the Securities and Exchange Commission.
The settlement includes a total of $140 million in civil penalties and disgorgement of profit, with $80 million to be paid by the fund company, based in Menomonee Falls, Wis.
In addition, the terms require Strong Capital to reduce fees charged to customers by 6% for a five-year period. The reduction is expected to cost the company $35 million in revenue.
The firm, with $35 billion in assets, was one of the first fund companies accused of improper trading when Spitzer disclosed his investigation in September.
Strong Capital allowed hedge fund Canary Capital Partners to engage in “market timing,” where profits are made by making rapid trades in fund shares. Such trading can lower returns for buy-and-hold investors.
Richard Strong, who owns 85% of Strong Capital, also was found to have earned $1.8 million by personally market timing funds managed by his company.
“My personal behavior in this regard was wrong and at odds with the obligations I owed my shareholders,” Strong said in a statement.
There had been speculation that Strong, who started his firm 30 years ago by selling funds door to door in the Midwest, would face criminal charges.
“People were thinking if anyone is going to jail it will be Dick Strong,” said fund industry watchdog Roy Weitz of FundAlarm.com in Los Angeles.
Spitzer said his team investigated whether to charge Strong with a criminal action, but decided against it. Such a charge would have been novel because market timing technically isn’t illegal, though fund managers are generally considered to have a fiduciary duty to prohibit it.
Strong had an incentive to settle the case because he is trying to sell his company. Wells Fargo & Co. is considered a leading bidder, sources have said.
