Wells Acquires Scandal-Plagued Strong Financial

Although the official announcement did not disclose the deal’s terms, news reports pegged the price as high as $700 million. Unnamed sources told the Wall Street Journal that Wells Fargo would first pay less than $500 million and then add additional payments based on how well Strong retains assets under management. These payments could total more than $200 million.

The $34 billion in AUM include $27 billion in mutual fund assets and $7 billion in institutional investment accounts. Wells Fargo will acquire the asset management businesses from Strong Financial, which has 70 mutual funds and serves 414,000 households or 870,000 active accounts, the companies said.

The deal announced Wednesday would seem to bring to a close the notable fall from grace for the 30-year-old Strong, headquartered in Menomonee Falls, Wisconsin. The firm and its founder, Richard Strong, became a casualty of the ongoing mutual fund market timing and late trading scandal.Since his name first surfaced among those who allowed improper mutual-fund trading, investors big and small have pulled out cash, and assets under management have fallen to $34 billion, down from $42 billion in the fall.

While the deal did not include any Strong Financial legal entities, according to the official announcement, it did cover Strong’s money management talent. The key investment teams of Strong Financial Corporation will join Wells Capital Management, a Wells Fargo subsidiary.   In fact, Wells said the Strong investment teams will continue managing the portfolios from their current locations using the same investment models.

However, news reports said Wells is expected to consolidate Strong’s funds to eliminate unprofitable portfolios. Nearly half of its stock and bond funds are below the threshold of $100 million in assets each that industry people say a fund generally needs to be consistently profitable. A dozen more Strong funds have less than $200 million in assets.

Wells said the deal will beef up the institutional investment lineup of Wells Capital Management, which manages equity, fixed income and customized portfolios for institutional clients.   In total, after the deal, Wells Fargo’s AUM is expected to be $217 billion, with mutual fund assets of $103 billion.

The deal is expected to be completed by the first quarter of next year, and is subject to approval by the Strong Funds Board of Directors, its Fund shareholders, shareholders of Strong Financial Corporation and Wells Fargo Funds Board of Trustees.  

Last week, Strong cleared the way for a sale by settling allegations with state and federal regulators that he traded rapidly in and out of his firm’s funds and allowed similar trading by hedge fund Canary Capital Partners LLC, hurting long-term investors (See Strong Settles with Federal, State Regulators ). As part of the settlement, the 62-year-old Strong agreed to pay fines and restitution of $60 million, to accept a lifetime ban from the securities industry and to apologize to his shareholders.

Under terms of the deal with the U.S. Securities and Exchange Commission and the New York and Wisconsin attorneys general, Strong Financial agreed to pay $80 million in fines and restitution. Strong Financial, in its settlement with the New York attorney general, also agreed to reduce its fees by at least $35 million over five years, pushing the total settlement to $175 million. Any firm that acquires Strong is required to follow the the fee-cutting agreement.