Outwardly, all is upbeat at Western Asset Management, which has invited its staff and clients to celebrate the New Year by watching the Rose Parade from WAMCO’s balconies in Pasadena, California, and cheer on the firm’s flower-bedecked entry, “Float Like a Butterfly.” The parade’s theme is “Best Day Ever!”
The same can’t be said today for WAMCO’s star bond trader, Ken Leech. He’s scheduled to appear in a Manhattan federal court Monday on fraud charges that have convulsed the investment firm and rippled through its owner, Franklin Resources. Pension funds and other big clients have yanked vast sums since an investigation into his trading was disclosed in August — about $65 billion so far, with more withdrawals in the works.
Inside WAMCO, the staff is trying without much guidance from above to keep the firm operating while fretting about whether they should be exiting, too, according to more than a dozen people with knowledge of the situation. Jim Hirschmann, WAMCO’s leader for more than two decades, has been rarely seen at the Pasadena headquarters, and Jenny Johnson, Franklin’s chief executive officer, has commented only briefly in public since Leech was charged.
“It’s a difficult situation,” Johnson acknowledged last week at a Bloomberg conference in London. “There is never much upside to talking about a government investigation publicly.”
WAMCO abruptly replaced Hirschmann as CEO this month and moved him into the newly created post of chairman. The change came after U.S. authorities accused Leech, Wamco’s former co-chief investment officer, of routinely waiting until late in the day to assign profitable trades to accounts that generated the most revenue, saddling other customers with losers.
The indictment late last month is a huge setback for Franklin, which had counted on the 2020 purchase of WAMCO’s parent, Legg Mason, to broaden its business and stem persistent outflows of assets. Active managers like Franklin have been steadily losing ground to low-cost purveyors of index funds. Bloomberg Intelligence said at the time of the deal that it might be “key to Franklin’s survival.”
Instead, the acquisition — which permitted WAMCO to continue operating independently from Franklin — has turned into a financial and reputational fiasco. Franklin has already taken a roughly $390 million writedown on WAMCO’s mutual fund business, and it’s facing an exodus of money along with the specter of its marquee manager appearing in a federal courtroom. The stock is down more than 25% this year.
Hirschmann hasn’t been accused of wrongdoing in the federal cases. “Western Asset is a global company with offices across multiple continents,” said a WAMCO representative. “As any CEO would, Jim spent a portion of his time traveling to other Western offices and meeting with clients across the globe.”
Leech is on leave from WAMCO and plans to fight the charges, which his lawyer says are unfounded.
Johnson portrayed the affair as isolated — “it was one person,” she told the conference attendees — and said Franklin is cooperating with investigators. She’s counting on Wamco’s remaining staff to turn things around.
“The most important thing is that we still have a lot of clients invested in Western Asset,” Johnson said. “So we have made sure that we insulated the investment team from a lot of what’s going on with the investigation, so that we can ensure that they’re managing clients’ money and staying focused on that.”
For some, it’s already too late. Defectors from the client list include the Marin County Employees’ Retirement Association, a customer for more than two decades with about $340 million. Almost $1 billion left with the Illinois Municipal Retirement Fund.
Hundreds of millions more was pulled by the Ohio Bureau of Workers’ Compensation, the Chicago Teachers’ Pension Fund, the Dallas Employees’ Retirement Fund and the Anne Arundel County retirement system. Some who remain, including the Fresno County Employees’ Retirement Association in California, are interviewing replacements.
Employee ranks are fraying, too. At least two department leaders have left, and rival asset managers are being inundated by resumes from WAMCO staffers, according to some of the people familiar with the situation.
The mood at WAMCO is tense and the lack of direction so marked that a full takeover of operations by Franklin would be a welcome outcome, said some of the people, who asked for anonymity to protect their jobs and relationships. Staffers are showing up to work early in the morning knowing they’re probably just going to have hit the “sell” button to raise the cash needed to pay off clients who are leaving, some of the people said.
The discontent is no small matter for an asset manager like Franklin. “People can walk out the door,” Johnson said at the Bloomberg conference. “It’s not like a lot of other types of businesses.”
On the day of Leech’s indictment, Hirschmann and two senior executives wrote to clients saying WAMCO had upgraded compliance systems and was “taking steps to invest in key personnel in our investment team and broader support functions, with an eye toward retention, to ensure continuity of the high-quality service you have come to expect.”
Some executives who learned of their bonuses in recent weeks also were informed about a retention package, the people said. Others wonder if they will be offered similar encouragement or if it’s worth it to stay, given the concern about getting tainted by WAMCO’s woes.
