Mutual fund maverick Richard Strong resigned Tuesday from Strong Capital Management, the $40 billion investment advisory company he founded 29 years ago, under the cloud of possible legal charges bystate and federal regulators and an outflow of investor funds that challenges the firm’s survival.
Strong’s departure is the latest in the mutual fund industry’s widening scandal, which has claimed the CEOs of Putnam Investments, Pilgrim Baxter and Security Trust. But regulators said they will press ahead with their investigations of the wealthy executive.
New York Attorney General Eliot Spitzer said last month that he would bring charges against Strong for making rapid trades in his funds that allegedly skimmed profit from long-term investors.
He also is examining Strong’s relationship with an affiliated hedge fund, Flint Prairie, and a family partnership, Calm Waters, that shared several overlapping investments with Strong Capital.
A spokeswoman for Spitzer, Juanita Scarlett, said Strong’s resignation ”is no factor in our ongoing investigation.” The Securities and Exchange Commission also is investigating.
Don Phillips, managing director of mutual fund analyst Morningstar, said, ”Spitzer’s only hinted at the evidence against Strong. But obviously the two parties who know the evidence — Spitzer and Strong — are acting as if the case is an exceptionally damaging one.”
More than $2 billion in investor funds have fled Strong Capital in recent weeks, and many institutional clients say they are reassessing their relationships with the company.
”He has built the company in his own image and in his own style,” said Ward Harris, managing director of McHenry Group. ”Firms built like that tend not to do well when the founding father goes out for a pack of cigarettes.”
In a statement, Strong said he ”always tried to act in the best interests of investors” and believed the company was ”well positioned for the future.” He said he would relinquish voting control of his company but expressed no intention to sell. Goldman Sachs reputedly offered Strong about $1 billion to cash out his stake a few years ago, near the market’s peak, an offer Strong turned down.
”I’d be surprised if he got a number anywhere close to that now,” said Morningstar’s Phillips. ”We’re talking about a penalty that will be in the hundreds of millions of dollars for Dick Strong personally. The market is exacting a huge cost, and the wheels of justice are still turning.”
Strong turned over the company’s management to Kenneth Wessels, a retired former executive of Dain Rauscher Inc., now RBC Dain Rauscher. The job of chief investment officer at Strong Capital goes to his longtime second in command, Richard Weiss.
