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Updated from 4:18 p.m. EST

The widening probe into trading improprieties at the nation's biggest mutual fund firms claimed two industry giants over the weekend: Richard Strong at Strong Mutual Funds and Lawrence Lasser at Putnam Investments.

Strong, whose short-term trading in shares of his own company's funds ignited a firestorm of controversy last week, resigned Sunday as chairman of the mutual fund company he founded in 1974.

Lasser, who rang up one of the industry's biggest paychecks while portfolio managers ran amok making questionable trades in their own funds, was formally let go Monday morning. The Boston-based firm also offered its customers what many viewed as a long-overdue apology.

The resignation came as Eliot Spitzer fulminated in Congress for a major fund industry overhaul.

Spitzer, speaking on Capitol Hill, said the mutual funds swept up in the scandal will have to pay a big fine. "This number will be big and it will cause pain and it should.''

Speaking at the same hearings, Stephen Cutler, director of the SEC's enforcement division, said the agency surveyed 34 brokerage firms and found that a quarter of those responding had allowed some after-hours trading in mutual fund shares. Normally this is illegal, but the brokers said they allowed late trading in special situations where there were order backlogs, or computer problems.

Cutler said regulators had yet to determine whether the trading activity violated securities laws and were still investigating the matter.

Richard Strong will remain chief executive of Strong Capital Management, the mutual fund company's adviser. Strong Mutual Funds' directors said they will hire an independent president to oversee the funds' management.

Strong is currently being investigated by the New York attorney general and

Securities and Exchange Commission

for allegedly ringing up about $600,000 in profit by dipping in and out of Strong-managed funds in a strategy known as "market-timing." The New York attorney general, Eliot Spitzer, is expected to file charges against Richard Strong later this week, possibly criminal ones.

Last week Massachusetts securities regulators and the Securities and Exchange Commission filed civil fraud charges against Putnam, after discovering that two Putnam portfolio managers made improper trades in their own funds.

Charles Haldeman, currently senior managing director and co-head of investments at Putnam, will replace Lasser as chief executive. The company's parent,

Marsh & McLennan

(MMC) - Get Free Report

, said Steven Spiegel, the senior managing director and chief of global distribution, was named Putnam vice chairman, while Ian Smith, formerly a Marsh chief executive, was named chairman of Putnam.

Putnam also said Barry P. Barbash, a former director of the Securities and Exchange Commission's division of investment management, has been hired to conduct an independent review of Putnam's policies and controls.

In Washington, Spitzer said much of the illegal activity his office has uncovered should have been detected by the mutual fund companies and the boards that are supposed to oversee each fund.

"The market-timers were so brazen about what they were doing, and so unconcerned that the mutual funds would put a stop to a practice that cost their long-term investors an enormous amount of money, that they openly advertised the fact that they were engaged in market-timing," according to a copy of Spitzer's prepared remarks before a Senate subcommittee.

The $7 trillion mutual fund industry is scrambling to clean up its act in the wake of the trading scandal that began with Spitzer's investigation, and which now includes simultaneous investigations by the SEC and Massachusetts securities regulators.

Massachusetts Secretary of the Commonwealth William Galvin, who has led the Putnam investigation, is also expected to soon file civil charges against a group of

Prudential Securities

brokers, in the ever-expanding scandal. Prudential Securities is jointly owned by

Prudential Financial

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(WB) - Get Free Report


Putnam, in announcing Lasser's ouster, tried to sound an apologetic note. But it's not clear whether the firm's belated efforts will appease institutional investors, some of whom have already withdrawn more than $2 billion from the company's funds.

"Marsh & McLennan and Putnam are committed to seeing that the interests of Putnam's clients and investors are well-served," Putnam said in a release. "We are taking actions today to address the issues that are confronting Putnam. The kind of conduct that occurred has no place at Putnam. We are taking measures to see that this does not happen again.

"We have previously stated that Putnam will make complete restitution to the Putnam funds for any losses suffered by Putnam shareholders as a result of any improper market-timing activities. We deeply regret that such conduct occurred and apologize to Putnam shareholders."

Strong has also offered to reimburse investors for any additional costs the short-term trading caused. Earlier in the week, Richard Strong offered to personally reimburse investors for any additional costs his own short-term trades caused. He also said at the time that he would consider resignation.

"If it becomes appropriate, I would be prepared to step aside to enable new leadership to bring new energies to this company," Strong said Thursday.

The Strong company also said last week that it planned to change its funds' board and to have a majority of independent directors hire former SEC chairman David Ruder to review compliance issues in the wake of the unfolding scandal.

Strong was one of the four fund companies accused in Spitzer's Sept. 3 complaint of allowing hedge fund Canary Capital Partners to make improper trades in their funds in exchanges for padded fees. Strong has also pledged to reimburse investors in the four funds in question if the firm determined investors were hurt by the trading.