Strong Capital Management Executives Barred from Mutual Fund Industry, Fined $140M
The Securities and Exchange Commission announced today a settled enforcement action against Strong Capital Management, Inc. (SCM), its founder and majority owner, Richard S. Strong, two affiliated entities and two other SCM executives, for allowing and, in the case of Strong, engaging in undisclosed frequent trading in Strong mutual funds in violation of their fiduciary duties to the Strong funds and their investors. The settled order requires the payment of more that $140 million in monetary remedies, and imposes regulated industry bars and other relief
Stephen M. Cutler, Director of the SEC's Division of Enforcement, said, "Strong Capital Management and its founder, Richard Strong, betrayed the mutual fund investors they were duty-bound to protect. In Richard Strong's case, his personal trades were a betrayal of the highest order, warranting the stiffest possible civil sanctions."
Robert J. Burson, Senior Associate Regional Director of the SEC's Midwest Regional Office, added, "This is the second time that Strong and SCM have been the subject of an SEC enforcement action for placing their interests before the interests of mutual fund investors. That fact, together with the gravity of the breach of trust reflected in the Commission's findings, shows that the severe sanctions imposed in this case are warranted."
The Commission's Order finds, among other things:
- SCM entered into an express agreement with hedge fund manager Edward Stern allowing his hedge funds (the Canary hedge funds) to market time certain Strong funds, in order to obtain non-mutual fund business from Stern and his family. The agreement enabled the Canary hedge funds to make approximately 135 round trip trades in four Strong funds, realizing gross profits of $2.7 million from December 2002 to May 2003. Under SCM's policies and procedures, other shareholders would have been ejected from the Strong funds for engaging in similar trading.
- Richard Strong engaged in frequent trading in several Strong funds, including one fund he managed. Between 1998 and 2003, he engaged in several hundred such trades, making gross profits of $4.1 million and net profits of $1.6 million.
- SCM failed to disclose the arrangement with Stern, and Strong and SCM failed to disclose Strong's personal trading, to the Strong funds' Boards of Directors or shareholders. In fact, the Strong funds' prospectuses and SCM's policies and practices created the misleading impression that frequent trading of the kind practiced by Strong and the Canary hedge funds would not be allowed.
- SCM provided the Canary hedge funds with the month-end portfolio holdings for the funds in which Canary traded before other shareholders could see the same information, to the possible detriment of the funds and their shareholders.
- SCM's affiliated transfer agent, Strong Investor Services, Inc. (SIS), and its affiliated broker-dealer, Strong Investments, Inc. (SII), facilitated SCM's violations by allowing the Canary hedge funds' frequent trading.
- Anthony J. D'Amato, SCM's Executive Vice President and a resident of Elm Grove, Wis., aided and abetted SCM's violations by approving the arrangement with the Canary hedge funds.
- Thomas A. Hooker, SCM's Compliance Officer, aided and abetted SCM's and Strong's violations by failing, after he learned of Strong's frequent trading, to follow up on a directive to monitor the trading and ensure it stopped.
Based on these findings, the Commission ordered (1) SCM to pay $40 million in disgorgement and $40 million in civil penalties; (2) Strong to pay $30 million in disgorgement and $30 million in civil penalties; (3) D'Amato to pay $375,000 in disgorgement and $375,000 in civil penalties; and (4) Hooker to pay a $50,000 civil penalty.
In addition, the Commission (1) barred Strong from association with any investment adviser, investment company, broker, dealer, municipal securities dealer or transfer agent; (2) barred D'Amato from association with any investment adviser, investment company, broker or dealer; and (3) barred Hooker from association with any investment adviser or investment company. SCM, SII and SIS consented to censures and undertook compliance and mutual fund governance reforms. All parties consented to cease-and-desist orders.
The Commission's Order finds that SCM and Strong violated Sections 206(1) and 206(2) of the Investment Advisers Act; SCM violated Section 204A of the Advisers Act and Section 34(b) of the Investment Company Act; D'Amato and SCM violated Section 204A of the Advisers Act and Section 34(b) of the Investment Company Act; D'Amato, SII, and SIS aided and abetted violations of Sections 206(1) and 206(2) of the Advisers Act; and Hooker aided and abetted violations of Sections 206(2) of the Advisers Act. SCM, Strong, SII, SIS, D'Amato and Hooker consented to entry of the Commission's Order without admitting or denying the findings.
This enforcement action has been coordinated with The Office of the New York Attorney General and the Wisconsin Department of Financial Institutions.
In the Matter of Strong Capital Management, Inc., et al., Release Nos. 34-49741, IA-2239, IC-26448