Richard S. Strong and the investment firm he founded, Strong Capital Management Inc., agreed to pay a combined $140 million to settle fraud charges involving improper trading in the company’s mutual funds, the Securities and Exchange Commission announced this morning.
In addition to the S.E.C., the New York attorney general, the Wisconsin attorney general, the Department of Justice and the Wisconsin Department of Financial Institutions were all part of the settlement.
Under the terms of the settlement, Strong Capital has agreed to disgorge $40 million of profits and to pay a $40 million penalty. The firm, which manages $33 billion in assets, was accused of allowing some of its clients to engage in trading that hurt other investors, but that allowed Strong to obtain non-mutual fund business. The settlement includes a provision that none of the parties will admit or deny any wrongdoing.
Mr. Strong, who agreed to a lifetime ban from the securities industry, is the highest-ranking executive to be punished in the investigation, started by Attorney General Eliot Spitzer of New York, into the practices of four mutual fund companies.
Through an agreement with the New York attorney general, Strong said this afternoon that it has also agreed to reduce fees charged on its mutual funds by a total of about $35 million over the next five years.
The company added that all costs associated with the settlements will be paid by the management company, not investors in any of Strong’s funds.
“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,” Kenneth J. Wessels, chairman and chief executive of Strong, said in a statement.
Mr. Strong, who founded Strong Capital 30 years ago and owns approximately 90 percent of the business, agreed to pay $60 million to settle with the S.E.C. Half of that amount is disgorgement of profits, the balance is in penalties.
Mr. Strong had been accused of profiting from frequent trades in his company’s funds, including one he managed.
In a statement, the S.E.C. said today that between 1998 and 2003, Mr. Strong engaged in “several hundred” such trades that generated net profits of $1.6 million.
Neither the firm nor Mr. Strong disclosed the improper trading to Strong Capital’s directors or to its shareholders, the S.E.C. said.
“In fact, the Strong fund prospectuses and S.C.M.’s policies and practices created the misleading impression that frequent trading of the kind practiced” on behalf of some of its clients and by Mr. Strong “would not be allowed,” the S.E.C. said.
Mr. Strong’s personal behavior was particularly egregious, the S.E.C said.
“His personal trades were a betrayal of the highest order, warranting the stiffest possible civil sanctions,” Stephen M. Cutler, director of the S.E.C.’s division of enforcement, said in a statement.
In addition to Mr. Strong, the S.E.C. also said that two other Strong executives had agreed to settle charges.
Anthony J. D’Amato, an executive vice president at Strong Capital Management, agreed to pay $750,000 in disgorgement and civil penalties. Mr. D’Amato was accused of approving the improper trading arrangement with certain Strong Capital clients.
Since the mutual fund investigation began, one other executive has been banned for life from the securities industry. Two others have been suspended.
James Connelly, former vice chairman of Fred Alger Management Inc, was banned for life from working for a brokerage or advisory company. Currently, he is serving a sentence of up to three years in a New York jail.
John Ballen and Kevin Parke, who respectively were chief executive and head of investments at MFS Investment Management, were fined by the S.E.C. and suspended for six and nine months, respectively. The two men were also fined and banned from serving as an officer or director of an asset management company for three years.