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Regulation and Compliance > Federal Regulation > SEC

Strong Capital Settles with SEC, States

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MENOMONEE FALLS, Wis. (–Strong Capital Management Inc., its founder Richard S. Strong and two senior executives together have agreed to pay US$140 million in restitution and civil penalties for their roles in allowing and carrying out market timing of the company’s mutual funds.

Additionally, Strong Capital agreed to cut its management fees by US$35 million over the next five years and implement other reforms as part of a settlement of market timing charges with the Securities and Exchange Commission and attorneys general in New York and Wisconsin.

The deal, announced Thursday [May 20], will result in Mr. Strong being banned for life from the securities industry. He also agreed to personally pay US$60 million in restitution and civil penalties and, in an apology required by the settlement, admitted to market timing his own firm’s funds, including one he managed. In the apology, he said his behavior was “wrong and at odds with the obligations I owed my shareholders.”

Mr. Strong, the firm’s chairman and chief investment officer until he resigned in December 2003, made more than 1,400 redemptions in Strong Capital Management mutual funds between 1997 and 2003, including 500 redemptions in 2001, earning net profits of US$1.6 million.

Two former Strong Capital executives, Executive Vice President Anthony D’Amato and Compliance Officer Thomas Hooker, also agreed to restitution and civil penalties and to prohibitions against ever holding jobs similar to those they held at Strong again in the securities industry. Mr. D’Amato approved timing arrangements with hedge fund Canary Capital Partners LLC, Secaucus, N.J., and Mr. Hooker failed to monitor Mr. Strong’s trading and ensure it stopped, according to SEC officials.

Stephen M. Cutler, director of the SEC’s Division of Enforcement, called the actions of Strong Capital and Mr. Strong a betrayal of mutual fund shareholders they were “duty-bound to protect” and said, in effect, that the punishment fit the crime. “In Richard Strong’s case, his personal trades were a betrayal of the highest order, warranting the stiffest possible civil sanctions.”

Strong is the latest in a string of big mutual fund companies–including Bank of America Corp., Charlotte, N.C., FleetBoston Financial Corp., Boston, (see Previous HedgeWorld Story) and Alliance Capital Management LP, New York (see Previous HedgeWorld Story)– to settle allegations by federal regulators and state law enforcement officials that they allowed market timing and late trading of their mutual funds, to the detriment of other long-term investors.

SEC officials and attorneys general in New York and Wisconsin had charged that Strong Capital Management, which is owned by Strong Financial Corp., allowed Canary to make 135 round-trip trades in Strong Capital Management mutual funds between December 2002 and May 2003. Canary realized gross profits of US$2.7 million from those trades, according to the SEC’s complaint.

According to the SEC’s complaint, Strong Capital:

  • failed to disclose to investors its relationship with Canary and Mr. Strong’s personal trading and, in fact, in its prospectuses led investors to believe that kind of trading behavior was not allowed.
  • provided Canary officials with month-end portfolio holdings for funds in which Canary traded before that same information was available to other shareholders.

“Investors in Strong funds did not always get treated equally and fairly as they had the right to expect,” said Wisconsin Attorney General Peg Lautenschlager.

Additionally, according to a statement from New York Attorney General Eliot Spitzer’s office, when Strong Capital learned federal and state investigators were looking into market timing at Strong, the company “suppressed information and delayed the production of relevant documents, including documents that revealed Richard Strong’s frequent personal trading.”

In a statement, Kenneth J. Wessels, chairman and chief executive of Strong Financial, said, “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.”

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Contact Robert F. Keane with questions or comments at:

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