The SEC announced late Nov. 25 it had charged former Western Asset Management co-CIO Ken Leech with fraud.
The SEC said in a news release that Leech had been "engaging in a multiyear scheme to allocate favorable trades to certain portfolios, while allocating unfavorable trades to other portfolios, a practice known as cherry-picking."
Leech routinely waited until later in a trading day to allocate trades among his client portfolios, a practice that happened at least from January 2021 to October 2023, the SEC alleged.
"As alleged, Leech allocated hundreds of millions of dollars of net first-day gains to favored portfolios, which also benefited Leech personally, and a similar amount of net first-day losses to disfavored portfolios," the news release said.
The U.S. Attorney's Office for the Southern District of New York also announced charges against Leech in a parallel action.
“This alleged behavior is an egregious abuse of power,” said Andrew Dean, co-chief of the SEC division of enforcement’s asset management unit, in the release. “By handpicking trades and sending them to portfolios he favored, Leech allegedly stood to profit personally and professionally.”
Jonathan S. Sack, a partner at Morvillo Abramowitz Grand Iason & Anello and counsel for Leech, said in a statement: “Ken Leech has an unblemished record over nearly 50 years as a trader and portfolio manager. These unfounded allegations ignore key facts, including the fundamental differences between distinct fixed-income strategies and the irrelevance of first-day performance to managing these strategies. Mr. Leech received no benefit from the alleged misconduct. We are confident that he acted properly at all times, and Mr. Leech will defend himself vigorously.”
Investor backlash
The backlash has been severe the past three months. A number of pension funds have terminated Western Asset Management after the Aug. 21 announcement by parent company Franklin Templeton that the SEC had issued a Wells notice to Leech, identifying him as a target of an investigation focusing on “past trade allocations involving Treasury derivatives."
Last week, the $56.4 billion Illinois Municipal Retirement Fund terminated Western Asset from a nearly $1 billion portfolio.
Franklin Templeton reported $48.6 billion in net outflows for the latest quarter ended Sept. 30. Separately, Franklin is expected to enact job cuts at Western Asset Management and will take over part of unit.
