Ex-CEO admits scandal role

MILWAUKEE -- Strong Financial Corp. founder and former CEO Richard Strong agreed Thursday to a $60 million fine to settle allegations he made improper mutual fund trades, becoming the highest level executive so far to admit his role in what has become an industrywide scandal.

The deal, and an agreement for the company to pay $115 million in related penalties, could smooth the way for a sale of the company, analysts said. The agreement also bans Strong and two other company executives from the financial industry for life.

"You can't get any higher than the fellow who is CEO and chairman of the board, and that's why his behavior has always struck as that much more egregious," New York Attorney General Eliot Spitzer said. That's why regulators insisted on a $60 million penalty for $1.8 million in personal benefit Strong made from the improper trades, he said.

The settlement is the latest in the improper trading scandal that has swept the $7 trillion mutual fund industry, resulting in subpoenas of dozens of companies and, in some cases, criminal charges and hundreds of millions of dollars in penalties.

Earlier this month, Janus Capital Group reached a $225 million settlement with regulators for its role in the trading scandal. Other previous big settlements for improper trading include a $675 million deal with Bank of America Corp. and FleetBoston Financial Corp., as well as a $600 million agreement involving Alliance Capital Management.

Other executives have stepped down or been charged in the scandal, but Strong is the first company founder and chairman to do so. Regulators said Strong, who did not admit to any wrongdoing as part of the settlement, will pay $30 million in disgorgement payments and $30 million in civil penalties for his actions.

The Menomonee Falls-based company he founded will pay $40 million in the return of revenues from the trading and $40 million in civil penalties as part of the agreements with New York, Wisconsin and the Securities and Exchange Commission. It also agreed to reforms that include new standards for board independence and accountability and will reduce its fees to Strong shareholders by 6 percent for five years, a reduction valued at $35 million.

"In previous years, 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," Richard Strong said in a written statement. "My personal behavior in this regard was wrong and at odds with the obligations I owed my shareholders, and for this I am deeply sorry."

The deal also requires Strong executive Anthony D'Amato and Thomas Hooker, former Strong director of compliance, to accept lifetime bars from the industry for their roles in improper trading. D'Amato will pay $750,000 in restitution and penalties; Hooker will pay a $50,000 penalty. Regulators said D'Amato helped faciliate market timing of Strong Funds by Canary Capital LLC, a hedge fund that agreed to a $40 million settlement last year to settle improper trading allegations.

Richard Strong and his company came under scrutiny last fall, when Spitzer went public with accusations that the then-CEO and chairman had market timed funds for his own gain, contrary to fund policy.

Market timing is a type of quick, in-and-out trading that is restricted by many funds because it tends to skim profits from long- term shareholders. Regulators say funds that allowed selective market timing, despite such policies, committed fraud.

The company eventually admitted that Richard Strong used his position to make improper trades of funds in his personal accounts as well as those of friends and family at the expense of ordinary investors. He resigned in December as company chairman, CEO and chief investment officer.

Investors have pulled more than $3 billion in assets from the company since then.

Paul Herbert, senior mutual fund analyst at Morningstar, a Chicago- based investment research company, said Thursday's settlement removes some of the uncertainty surrounding the company.

There has been speculation that San Francisco-based Wells Fargo might buy Strong Financial, though a Wells Fargo spokeswoman declined to comment Thursday.

Wisconsin regulators said the provisions of the settlement -- the penalties and fees -- would apply to a new owner if someone else buys Strong. However, the other injunctive relief, such as the requirement that Strong's board of directors be independent, would not.

Also, Richard Strong, who owns 85 percent of the company, is not prohibited from benefiting from the sale.

Contributing: Jenny Price; Michael Gormley

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