Strong steps down

Embattled funds chairman says he’ll move to divest

By KATHLEEN GALLAGHER

[email protected], Journal Sentinel

Wednesday, December 3, 2003

Battered by three months of accusations against him and his company, Richard S. Strong resigned Tuesday as Strong Financial Corp.’s top executive.

Strong, 61, also resigned from the boards of Strong Financial and the Strong mutual funds and said he would “take steps” to divest himself of voting control of the firm. Strong owns about 90% of the company.

“For the past 29 years, this firm and what it represents have meant everything to me and I have always tried to act in the best interests of shareholders,” Strong said in a statement. “After weeks of intense reflection, I have come to realize that the best way for Strong Financial to pursue its promising future is for me to step down.”

Kenneth J. Wessels, who founded a Minneapolis investment banking firm that was acquired by Dain Rauscher Inc. in 1998, will replace Strong as chairman and chief executive of the Menomonee Falls company.

Strong’s troubles began Sept. 3, when New York Attorney General Eliot Spitzer first implicated Strong Capital Management Inc. for giving a New Jersey hedge fund special opportunities to trade in certain Strong funds that other shareholders didn’t have.

The company’s problems intensified Oct. 29, when Spitzer’s office said it planned to take action against Strong personally, based on allegations of improper short-term trading of his company’s mutual funds, prompting Strong to resign as chairman of the firm’s mutual fund board.

Spitzer has not charged Strong or his firm with anything to date. But his wide-ranging probe of the mutual fund industry has resulted in charges against several companies and prompted the departures of top executives at Pilgrim Baxter & Associates, Putnam Investments, Securities Trust — and now Strong.

A spokesman for Spitzer’s office had no comment on Strong’s resignation other than to say it would not affect the investigation.

The resignation — and Wessels’ investment banking background — immediately prompted speculation that Strong would end up selling the firm he has been building so ardently and single-mindedly since 1974. Today, the company manages 66 mutual funds, has $43 billion in assets and employs 1,300 people.

But the language the company used in its news release suggests Strong could conceivably give up his voting rights but still influence if or when the company is sold. Strong, for instance, could keep his economic interest while putting his shares of Strong Financial in a trust that gave voting control to trustees he designated.

“This move is hardly a definitive statement he’s gone,” said Don Phillips, president of Morningstar Inc. in Chicago. “It almost sounds like they want to leave the door open so if Dick Strong exonerates himself, he can step back in.”

Strong is exploring various options for achieving the divestiture with his advisers, company spokeswoman Stephanie Truog said, but declined to comment further.

Strong’s resignation was something that needed to happen for the firm to go forward on a day-to-day basis, said Roy Weitz, publisher of Fund-Alarm.com, an online newsletter that offers advice on which mutual funds to sell. But Strong should have determined how to go about the divestiture before announcing his resignation, Weitz said.

The resignation “has pluses, minuses and obfuscation — like everything he’s done since Sept. 3,” Weitz said. “You tie down all the loose ends, and you don’t leave that open. That’s just asking for a charge of clouding the issue.”

Strong employees were informed of Richard Strong’s resignation at an all-company meeting. The mood was somber among those who stopped to talk to a reporter as they left work Tuesday evening.

“It’s a sad turn of events,” said one employee who declined to give a name.

Late into the evening, past the trees glowing with holiday lights in the lobby, employees manned the phones at the company’s 24-hour call center.

“It’s a sad day, that’s all I can say,” said receptionist Colleen Nodle.

Outside successor

Some suggest Strong’s resignation was prompted by the discussions Strong and his firm are having with Spitzer, the Securities and Exchange Commission and the Wisconsin Department of Financial Institutions.

“There may have been a lot of maneuvering between Spitzer’s office and Strong himself as to what the next step would be,” said state Treasurer Jack C. Voight. “Dick Strong doesn’t do things like this very easily. To save the company and the jobs in Wisconsin, he was willing to step aside.”

Another source familiar with Strong’s discussions with federal and state agencies said Strong’s resignation “was not a bargaining chip.”

Wessels, Strong’s new chairman and chief executive, co-founded the Minneapolis investment bank Wessels, Arnold & Henderson and served as its chief executive officer until it was acquired by Dain Rauscher. Before that, he was an executive vice president at Piper Jaffray and a partner at the San Francisco investment bank Robertson Stevens.

Richard T. Weiss, a longtime Strong portfolio manager and one of just two Strong Financial board members with Strong, will lead Strong’s investment department, though he will not become chief investment officer.

Strong Financial’s board will consist of Wessels, Weiss and Frank P. Doyle, a former executive vice president of General Electric Co. who has in the past been a consultant to the company.

Stanch the outflow

Some wondered whether Wessels was the right choice to lead Strong through its problems, given his lack of mutual fund industry experience.

“The cultural issues are important, and there’s no indication Wessels even has a notion of what type of culture is appropriate and that he can institute it,” Weitz said.

Weitz said Strong’s resignation will help the firm stanch the outflows from its funds.

“At least in the foreseeable future it takes away a major reason for fiduciaries to leave, because they don’t have to worry about the threat he is going to be sanctioned or barred,” while still running the company, Weitz said.

Others, though, who have already pulled funds from Strong said Richard Strong’s resignation likely wouldn’t have affected their decision.

“I can’t speak for the board, but it likely would not have changed my recommendations to the board,” said Michael Parker, executive director of the Oregon 529 College Savings Network.

“I don’t want our investors subject to a firm that’s not completely focused — and how could you be when you’ve got this whole thing swirling around you.”

While remaining Strong fund shareholders are deciding whether to stay or go, many believe Strong himself will be weighing how the next chapter in his firm’s history will be written. Some, such as Phillips, say they can’t imagine him selling unless he absolutely has to.

“It’s got to be incredibly difficult for him not to be involved in what is his life’s work,” Phillips said. “Knowing Dick Strong and the passion he has for what he’s created, it would be like having a limb severed to have it gone.”

Tom Held, reporting from Menomonee Falls, and Avrum D. Lank of the Journal Sentinel staff and the Associated Press contributed to this report.

RICHARD S. STRONG

Resigns as chairman, chief executive and chief investment officer of Strong Financial Corp., and from the boards of the company and its funds. He had previously resigned as chairman of the funds’ board of directors.

KENNETH J. WESSELS

Takes over as chairman and CEO of Strong Financial Corp. Wessels is former president of the Dain Rauscher Wessels Capital Markets division and director of Dain Rauscher Inc.

RICHARD T. WEISS

Longtime Strong portfolio manager will lead Strong’s investment department. Weiss has been portfolio co-manager of the Strong Advisor Common Stock and Strong Opportunity funds since 1991.

STRONG START, FRAYED FINISH

1974: Richard Strong and William D. Corneliuson found Strong Corneliuson Capital Management Inc. after a split between Strong and Albert O. Nicholas. The two had run Nicholas, Strong & Co., an investment advisory firm.

1988: Strong Corneliuson moves to new headquarters in Menomonee Falls. Assets under management: $2.1 billion; 70 full-time, 100 part- time employees.

1993: Co-founder William D. Corneliuson retires from Strong, citing health reasons.

1994: Strong and his firm sanctioned by the Securities and Exchange Commission for making improper trades among its funds in the late 1980s and not telling investors about conflicts of interest.

1996: In response to an action filed by the U.S. Department of Labor, Strong Capital reimburses certain pension accounts $5.9 million over related allegations.

1997: Strong bails out three of its money market funds that were holding short-term debt of Mercury Finance, a used-car lender that had failed to meet a payment.

2000: The state Legislature expands the state’s college savings program, including EdVest, which allows parents to set aside tax- deferred money in various funds for their children’s college education. One year later, Strong Capital gets exclusive contract to handle EdVest funds.

Sept. 3, 2003: New York Attorney General Eliot Spitzer implicates Strong Financial Corp. in a scheme to allow a New Jersey hedge fund to trade in and out of five of its mutual funds more often than other shareholders. In exchange, Canary Capital Partners LLC deposited money — Strong has said $500,000 — in Strong’s hedge funds, Spitzer said. The company has about 1,300 employees and about $43 billion in assets under management.

Oct. 29: New York attorney general’s office says it will take action against Strong, alleging that he profited from improper trades in and out of shares of his company’s mutual funds. Wall Street Journal reports Strong netted at least $600,000 in profits.

Oct. 30: Strong pledges to reimburse Strong funds if any financial losses resulted from his alleged improper trading.

Oct. 31: Strong loses $933 million of assets between early September and the end of October.

Nov. 2: Strong resigns as chairman of Strong’s mutual funds board. Company also hires a former SEC chairman as a consultant. Strong admits he made the trades in question but does not believe they were “disruptive” to the funds.

Nov. 12: The Idaho Endowment Fund Investment Board fires Strong Capital Management Inc. as one of its investment managers. A day later, the Oregon College Savings Board votes unanimously to fire Strong Capital Management Inc. as the administrator of one of the state’s college savings programs.

Nov. 19: Strong’s trades in his company’s mutual funds exceeded prospectus guidelines, the managing director of Strong Financial Corp.’s institutional business says. A company spokeswoman, however, disputes that and says Strong did not believe his trading in Strong funds was disruptive.

Dec. 2: Richard S. Strong resigns as top executive of Strong Financial Corp. Kenneth J. Wessels, who founded a Minneapolis investment firm that was sold in 1998 to Dain Rauscher Inc., will take over as chairman and chief executive of the firm. Longtime Strong portfolio manager Richard T. Weiss will lead Strong’s investment department.