Multimillionaire Richard S. Strong and his mutual fund company Strong Capital Management Inc. agreed Thursday to pay $140 million in fines and restitution to settle allegations by federal, New York and Wisconsin regulators that the firm founder improperly profited from personal short-term trading at the expense of his investors.
The Menomonee Falls, Wis., fund company will pay a $40 million fine plus $40 million in restitution and cut its fees to fund customers by 6 percent for five years, an estimated $35 million. The Securities and Exchange Commission barred Strong from the securities industry for life.
Strong, 62, will pay $60 million personally for what New York Attorney General Eliot L. Spitzer described as 1,400 short-term trades that netted him $1.8 million over six years. The penalty assessed against Strong is by far the largest amount to be paid by an individual in the mutual fund scandal.
At Spitzer's insistence, Strong also issued a personal statement expressing contrition. The fund company had stated publicly that such trades, known as market timing, were barred because they cut into returns for long-term investors.
"I now want to apologize to the many thousands of shareholders of Strong Funds. . . . 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 said in the statement. "My personal behavior in this regard was wrong."
Strong, who has an estimated net worth of $800 million, stepped down as chairman and chief executive of the fund management company in December and was replaced by Kenneth J. Wessels. He is also trying to sell his 85 percent stake in the firm, and Wells Fargo & Co. is the likely buyer.
Strong Capital Management was one of the first companies to be publicly accused of allowing favored customers to engage in market timing. The firm, which manages 71 funds, was one of four cited in Spitzer's Sept. 3, 2003, complaint against Canary Capital Management LLC, a New Jersey hedge fund, that made the scandal public. The Strong executive who dealt directly with Canary, Anthony J. D'Amato, and the firm's former compliance director, Thomas A. Hooker, have been barred from the mutual fund industry as part of the settlement.
When regulators learned in October that Strong personally had traded in the funds -- and continued doing so even after his firm's lawyers told him he shouldn't -- Spitzer singled the firm out for particular criticism and said publicly that he was weighing bringing criminal charges.
But in the end, Spitzer said in an interview, he decided it would not be fair to prosecute Strong because timing -- rapid trading that seeks to exploit short-term differences between a fund's share price and the value of its assets -- is not itself illegal.
"This was not an appropriate criminal case. Timing had never been pursued as civil offense, let alone a criminal one," Spitzer said. Nonetheless, he said, he insisted on a fine many times the size of Strong's profit and a public apology because "it's bad behavior, and the bad behavior in this case went up to the board room."
Spitzer's office has so far brought criminal complaints against firms and executives only for "late trading" -- placing same-day mutual fund orders after the New York markets closed at 4 p.m. -- a practice they say is clearly illegal.
Richard Strong's attorney Stanley S. Arkin said his client "is happy it's behind us. All throughout the negotiations, Mr. Strong's intent was to seek to preserve the jobs and the future of the many talented people at Strong Capital."
Wessels, the new chief executive, said in a statement that the settlements "allow us to move forward and concentrate all of our energies on meeting the needs of our clients and delivering high-quality investment performance." Strong's independent directors issued a statement saying they were "pleased that these regulatory matters have been resolved." The firm had $33.8 billion in assets under management in April.
According to the regulators, Richard Strong did not initially come clean about his personal trading. The firm failed to include him on a list of frequent traders and delayed turning over documents that implicated him, the SEC complaint said.
"The conduct really strikes at the heart of the duty Richard Strong owed to his shareholders. He engaged in conduct for his own personal benefit to the detriment of the shareholders," said SEC Enforcement Division chief Stephen M. Cutler.
Rep. Michael G. Oxley (R-Ohio), who chairs the House Financial Services Committee, said in a statement that the Strong case reinforces the need for independent chairmen for fund boards. He said 16 of the 19 fund families implicated in the trading scandal had management-affiliated chairmen of their boards.
"These two jobs simply can't be performed effectively by the same person," Oxley said. "The dual role creates too many opportunities for self-dealing for both personal and business gain."