New York, Wisconsin Settle "market Timing" Allegations With Strong Capital Management And Its Founder
New York Attorney General Spitzer and Wisconsin Attorney General Peg Lautenschlager today announced a $175 million settlement with a leading mutual fund company, its founder and other employees and entities to resolve allegations of unlawful trading of mutual funds.
The settlement with Strong Capital Management Co. (SCM) and its founder Richard S. Strong, which follows a lengthy investigation by the State of New York, the State of Wisconsin, and the Securities and Exchange Commission, includes $140 million in disgorgement and civil penalties, fee reductions, lifetime bars of Richard Strong and other SCM executives. It also establishes structural reforms for fees, sets new standards for board independence and accountability at the mutual fund company and preserves jobs at SCM.
"The settlement we reached will protect Strong investors from overreaching by their fund managers. Shareholders have a right to expect nothing less," Spitzer said. "This agreement is part of our on-going effort to clean up the mutual fund industry and demand accountability from those who have been entrusted by the investing public."
"Investors in Strong funds did not always get treated equally and fairly as they had the right to expect," said Attorney General Lautenschlager. "This settlement appropriately accounts for those inequities. The settlement also ensures worthwhile reforms, while giving the company a positive opportunity to address its future."
Strong Capital Management, located in Menomonee Falls, Wisconsin, has been a leading mutual fund advisor with 71 mutual funds under management. Richard Strong owns approximately 85-percent of the company and served as its Chairman and Chief Investment Officer until December 2003.
According to a complaint filed by Spitzer's office in connection with today's settlement, the investigation uncovered that while SCM was warning investors that they could be barred from trading for market timing, Richard Strong himself was engaging in that practice for his own personal gain, and another high-level official had arranged for Canary Capital Partners to time funds managed by the firm to lure Canary's other lucrative business. Strong's personal gain is estimated at $1.8 million.
In addition, regulators alleged that Richard Strong concealed his misconduct from investors.
Under terms of the agreement, Richard Strong will be barred from the securities industry for his lifetime. Anthony D'Amato, one of the firm's highest executives, also receives a lifetime bar, as does Thomas Hooker, formerly SCM's director of compliance.
Of the $140 million in disgorgement and penalties, $80 million will be paid by SCM, and an additional $60 million will be paid personally by Richard Strong. Fees to Strong shareholders will be reduced by 6% for a five-year period, a reduction valued at $35 million.
According to today's complaint, documents provided to regulators showed that Richard Strong made more than 1,400 redemptions in Strong Funds over six years, with over 500 in 2001 alone. In a statement issued by Richard Strong in connection with the settlement, he admitted to frequent trading of Strong Funds, which was the opposite of advice given by the firm to members of the public that they should hold Strong shares for the long term. Strong further stated: "My personal behavior in this regard was wrong and at odds with the obligations I owed my shareholders."
Today's complaint also alleges that, when the Attorney General began to investigate market timing practices at SCM, the firm suppressed information and delayed the production of relevant documents, including documents that revealed Richard Strong's frequent personal trading.
The investigation resulting in today's settlement was conducted by Assistant Attorneys General Harold J. Wilson, R. Verle Johnson, and Deputy Attorney General Peter B. Pope in Spitzer's office; and Assistant Attorney General Eric J. Wilson and Deputy Attorney General Daniel P. Bach in Lautenschlager's office.
The Attorney General thanked Kara M. Washington, Richard J Gorman, Jane E. Jarcho, and Robert M. Burson of the Securities and Exchange Commission for their assistance in the case.
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