Strong, his firm fined millions

Mutual fund innovator to pay $60 million penalty

Company is assessed $80 million

Punishment helps settle claims by SEC, N.Y., Wis.

May 21, 2004|By NEW YORK TIMES NEWS SERVICE

Richard S. Strong, who helped fuel the extraordinary growth of mutual funds over the past three decades, has agreed to pay $60 million and be banned from the financial industry for life to settle an investigation over rapid trades he made at the expense of investors in his funds.

The founder of Strong Capital Management Inc. is the most prominent figure to be ensnared in a sweeping investigation of improper trading in mutual funds begun last September by Eliot Spitzer, the New York attorney general. 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.

Strong Capital, based in Menomonee Falls, Wis., agreed to pay $80 million and cut management fees for its mutual funds by 6 percent over the next five years.

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

The amount Strong is paying is the largest penalty by an individual since the mutual fund investigation began.

Of course, criminal cases involving Wall Street figures have resulted in much larger fines. Still, Spitzer noted that Strong's penalty is significant in proportion to his trading profits.

The sanctions against Strong, 62, and his company are part of settlements negotiated jointly with Spitzer, the Securities and Exchange Commission, the Wisconsin attorney general and the Wisconsin Department of Financial Institutions. The amounts to be paid by both the company and Strong personally will go to investors harmed by the improper trading.

Strong wrote a statement of contrition that was released by Spitzer's office yesterday.

"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," Strong wrote. "I frequently traded the shares of the Strong funds, at the same time that the advice which we gave our investors was to do the opposite and to hold their shares for the long term."

Strong rose to prominence from modest roots in North Dakota and Minnesota. Today, Strong Capital manages $33.8 billion in assets in mutual funds and for institutions including pension funds.

Forbes magazine has estimated Strong's personal wealth at $800 million. But it was a relatively small gain that resulted in his downfall.

He made $1.8 million in profits on hundreds of short-term trades in Strong Capital mutual funds, even as the company's public filings indicated that it discouraged such activity, Spitzer's office said.

The company also permitted a hedge fund, Canary Capital Partners, to trade rapidly in and out of Strong's funds, regulators said. The trades by Canary and its manager, Edward Stern, were first disclosed by Spitzer in a $40 million settlement with the fund and Stern in September.

Spitzer had weighed bringing criminal charges against Strong for the trading and had convened a grand jury to consider the case. While Strong avoided criminal charges, he agreed to pay $60 million in penalties and forfeited profits.

Strong will be banned from associating with any investment or brokerage firm, regulators said. The settlement does not preclude him receiving any profits from the sale of Strong Capital, of which he controls 85 percent, the New York attorney general said. Strong resigned in December as chairman of the company.

Strong announced in December that he was looking for a buyer for his stake in Strong Capital, and Wells Fargo, the big, San Francisco bank, is the leading candidate to buy it.

A sale would come after Strong hurt the business he sought so hard to develop. Assets at the company declined to $33.8 billion under management at the end of April from $43 billion at the end of September.

Strong had hoped for close to $1 billion, people briefed on the sale negotiations said; now he is likely to get half that amount.

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