Strong Settles for $175M; Is Bought by Wells Fargo
May 31, 2004
The bidding is over for the scandal-tarnished Strong Capital Management. Wells Fargo reached a definitive agreement last week to purchase Strong's $27 billion in mutual fund assets and $7 billion in institutional investment assets. Although terms of the deal were not disclosed, Wells reportedly will pay less than $500 million in a first payment and then up to $200 million in subsequent installments, depending on which direction Strong's assets under management go.
Since the scandal began, Strong has lost $8 billion in assets and is down to $34 billion. The founder of Strong, Richard Strong, could have sold the firm for $1 billion in 1997, but balked.
The deal comes on the heels of a settlement by the firm, its transfer agent, broker/dealer and founder to pay more than $175 million to the SEC and the attorneys general of New York and Wisconsin for market-timing abuses. As part of the deal, Strong and the two executives are permanently barred from the fund industry, and Strong was forced to issue an apology, which some industry observers believe could pave the way for lawsuits.
The SEC found that while Strong Capital told investors they could be barred from the company's funds for market timing, it allowed Canary Capital to market time Strong funds through 135 round-trip trades resulting in $2.7 million in gross profits. Strong himself market timed a number of his firm's funds, including one he managed between 1998 and 2003, resulting in $4.1 million in gross profits and $1.6 million in net profits. Strong reportedly made more than 1,400 redemptions over a period of six years.
Strong Capital failed to disclose the arrangement with Canary or Strong's own personal trades to the board of directors or to shareholders, the SEC said, while the firm's transfer agent and broker/dealer facilitated the arrangement. Also charged are Anthony D'Amato, Strong executive vice president, for approving the deal with Canary, and Thomas Hooker, the firm's chief compliance officer, for failing to stop the arrangement or Strong's personal trades after learning of them.
Strong Capital will pay a total of $80 million in disgorgement and civil penalties, while its founder will pay $60 million. D'Amato is being fined $750,000 in disgorgement and civil penalties, and Hooker a $50,000 civil penalty. Also as part of the deal, Strong Capital will reduce its fees by 6% for five years, a value of $35 million.
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