A former Western Asset Management executive said he brought suspicious trading activity at the firm to the company’s attention in 2012, more than a decade before regulators indicted former WAMCO CIO Ken Leech for allegedly cherry-picking trades between 2021 and 2023 to benefit favored accounts.
Steve Fulton, who was serving at the time as CIO of Western Asset Mortgage Capital Corp. and WAMCO’s head of agency residential mortgage-backed securities, alleged in an interview that in 2012 he found Leech allocating a disproportionate share of losing trades to the WAMCO core/core plus strategies Fulton was contributing mortgage bond exposures for and a preponderance of winning trades to Leech’s newly launched best ideas Macro Opportunities strategy.
The SEC and the Department of Justice’s Southern District of New York cited a similar pattern in leveling charges against Leech — one of the fixed-income market’s most prominent investors over the past three decades — in November.
Leech, through a representative, denied any wrongdoing, either in 2012 or more recently.
Fulton said he uncovered the suspicious trades in 2012 and alerted the leadership at WAMCO the same year.
He said WAMCO’s leadership did not act in response to his complaint and — following 10 years with the firm — Fulton chose to depart in 2013 after executives there made it clear, he contended, that his prospects for advancement at WAMCO were limited.
Fulton said that outcome effectively ended his career in money management, something he had anticipated. “When I made my internal report, I pretty much knew my career was over,” he said.
Even so, Fulton claimed, he decided to act because he “just wanted the accounts to be treated fairly and ethically.”
A WAMCO spokeswoman, in an emailed statement, said “Western Asset is aware that an individual came forward claiming to have brought a complaint to its general counsel in 2012. The company looked into it and has found no records of such a complaint. Nor does its former general counsel recall any such complaint.”
A spokeswoman for Franklin Templeton, the global money management firm that acquired WAMCO in 2020 with its purchase of Legg Mason’s multiboutique business, declined comment.
Whistleblower filed with SEC
Fulton said he proceeded to file a whistleblower report with the SEC in 2013.
While acknowledging the situation at present could be at a he-said, she-said impasse, Fulton cited his efforts now to retrieve a copy of his SEC whistleblower report as something that could move the conversation forward.
Fulton said he initially decided to look into the firm’s trading patterns in 2012 after learning that trades were being allocated late in the day.
That “just sort of surprised me, and so I did some digging” and found winning trades allocated at the end of the day going one way and losing trades going in another direction.
Differences in the size and scale of the strategies involved could offer one possible explanation for that pattern, Fulton speculated. The same $100,000 trading gain capable of providing a meaningful boost for a Macro Opps strategy with $300 million or $400 million in assets under management at that time would have an imperceptible impact on a core/core-plus franchise with hundreds of billions in assets under management, he noted.
"I ran agency mortgages, and I was CIO of the publicly traded REIT. I also made allocations into core and core full accounts. So, our trading overlapped, if you will," Fulton said.
"The way it works is that multiple portfolio managers run core and core full accounts. There's one head portfolio manager, but a lot of people allocate into those funds, depending upon which sector they're involved in. So, the corporate team would allocate corporate bonds, the mortgage team, which was me, would allocate mortgage bonds, so accounts that we co-managed, if you will, were on the receiving end of the negative trades," he said.
Fulton said he had to work to figure out what was going on.
"I had to go back in and look at the trades. Any trade can be pulled up on the system by trader or by account, and you could see when the trade was done and when it was allocated. So, you could see that trades that were offsetting; in other words, one trade would be long a certain security, the other trade would be short a certain security, but they basically offset each other, and then they would be allocated at the end of the day, just exactly what the SEC is alleging. They would be allocated at the end of the day, with the winning trades going into Macro Ops and the losing trades going into core and core full."
While nothing apparently came of the whistleblower report he filed with the SEC in 2013, Fulton said he was “recently interviewed by the SEC, the Federal Bureau of Investigation and the Department of Justice.”
A spokesman for the SEC declined comment. Spokespeople for the FBI and the DOJ couldn’t immediately be reached for comment.
WAMCO outflows
WAMCO’s business has been hit hard since August, when Leech first received notification from the SEC of a preliminary determination to institute a proceeding against him. Net outflows by institutional clients have come to more than $100 billion over the last five months of 2024.
The latest defections include the $56.4 billion Illinois Municipal Retirement Fund, which terminated WAMCO’s $973 million active domestic core-plus fixed income portfolio; the $11.5 billion Rhode Island Employees’ Retirement system, which withdrew its active $508 million long-duration U.S. Treasuries mandate; and the $1.3 billion Chicago Firemen’s Annuity & Benefit Fund, which took back $158 million in active core-plus allocations.
Those outflows have been focused on the big WAMCO core, core-plus strategies that Leech was closely associated with.
Even after the body blows of the past five months, Western remains one of the industry’s biggest fixed-income managers, with $272.2 billion in assets under management as of Dec. 31, according to Franklin's monthly AUM reports. That total was down from $353.3 billion as of Sept. 30.
However, the suggestion that WAMCO had some knowledge of trading irregularities well before the 2021 to 2023 time period cited in the SEC and SDNY actions against Leech could throw a spotlight on both the broader firm’s actions as well as what then-parent Legg Mason knew and disclosed when Franklin was doing due diligence in the run up to its 2020 acquisition of Legg, noted an industry source, who declined to be named.