Western Asset Management Co. will pay $21 million to settle charges involving internal coding errors and cross trading resulting in some investor losses, the SEC and Labor Department announced Monday.
The settlements conclude investigations into alleged client losses related to the coding error that were not disclosed to WAMCO's institutional ERISA clients at the expense of others, officials from the Securities and Exchange Commission said in a statement.
The cross-trading charges involved activity during the financial crisis that SEC officials claimed deprived selling clients of some savings.
Legg Mason spokeswoman Mary Athridge said in an interview the company is glad to resolve the issue.
The company, which neither admits nor denies the charges, chose to settle to avoid the expense and distraction of litigation, and most of the $21 million is covered by insurance, Ms. Athridge said. She added that WAMCO has strengthened its internal controls for the procedures covered in the settlement.
The two settlements — for coding error disclosure and cross-trading violations — conclude four years of joint SEC and DOL investigations that started in 2007.
In the coding error case, the Labor Department found that WAMCO used funds from 99 accounts to purchase $90 million of mortgage-backed securities that were downgraded as the market declined and were therefore not allowed under ERISA. While WAMCO's compliance system recognized the prohibition, the accounts held the securities until 2009, when they were sold at a significant loss to the account holders. WAMCO will restore those losses with interest and pay $2 million in federal penalties.
A separate settlement order involves other client accounts, for which WAMCO from 2007 through 2010 engaged in cross trading across client accounts in prearranged, dealer-interposed transactions, in violation of ERISA. While cross trades can serve a legitimate purpose, said Julie Riewe, co-chief of the SEC enforcement division's asset management unit, moving them across client accounts and allocating the savings to the buyers deprived the selling clients of their share of the savings. WAMCO will distribute $7.4 million to those clients and pay $1.6 million in penalties to the SEC and the DOL.
