Ethics Newsline®

WASHINGTON
Richard Strong, founder of the Wisconsin-based mutual fund firm Strong Capital Management, last week settled federal fraud charges by agreeing to $60 million in penalties and a lifetime ban from the financial services industry.

The Strong Capital firm also agreed to pay $80 million.

Strong and his firm were implicated last September in a report by New York Attorney General Eliot Spitzer, who shocked investors with allegations that the mutual fund industry was engaging in widespread misconduct.

Among the first firms to be named by Spitzer, Strong Capital was accused of letting powerful clients engage in rapid short-term trades, known as market timing, while barring common investors from the practice.

That two-faced approach, designed to win business from wealthy clients and enrich favored investors, is not strictly illegal but is widely regarded as improper, especially when brokerages refuse to disclose their activities.

The case against Strong Capital was compounded by the fact that former chief executive and chairman Richard Strong allegedly engaged in hundreds of market timing trades himself, reported the New York Times.

The irony that a powerful chief executive worth an estimated $800 million would jeopardize his career for those trades’ relatively paltry $1.8 million in profits was noted by the Times.

Strong resigned last December. Today, the firm he founded manages slightly less than $34 billion — a drop of more than 20 percent since before the scandal broke, according to the report.

“His personal trades were a betrayal of the highest order, warranting the stiffest possible civil sanctions,” U.S. Securities and Exchange Commission Enforcement Director Stephen Cutler said in a statement.

In settling the case last week, Strong neither admitted nor denied wrongdoing. Instead, he was required by regulators to write a letter of contrition, which was released by the SEC.

“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 wrote.