NEW YORK – The U.S. Securities and Exchange Commission (SEC) has filed fraud charges against Stephen Kenneth “Ken” Leech, the former co-chief investment officer (CIO) of Western Asset Management Company LLC (WAMCO), alleging that he engaged in a multi-year scheme of cherry-picking trades to favor certain portfolios while disadvantaging others. The SEC claims that Leech allocated hundreds of millions of dollars in gains and losses to specific portfolios, violating his fiduciary duties to clients.
The SEC’s complaint, filed in the U.S. District Court for the Southern District of New York, accuses Leech of waiting until later in the trading day to allocate trades, a practice that allowed him to observe price movements and unfairly assign profitable trades to favored portfolios while assigning losing trades to less favored ones. According to the SEC, this manipulation occurred from at least January 2021 through October 2023.
“Leech’s fraudulent conduct, which lasted for years, is a shocking betrayal of the trust placed in him by his clients,” said Sanjay Wadhwa, Acting Director of the SEC’s Division of Enforcement. “Investment advisers are required to act in their clients’ best interests, but Leech’s actions prioritized his own benefit over that duty.”
The SEC alleges that Leech’s actions benefited both his clients’ portfolios and his own financial interests, as the favorable trades contributed to better performance in the portfolios he favored. The complaint highlights that the net first-day gains from these favored trades amounted to hundreds of millions of dollars, while the net first-day losses were disproportionately allocated to disfavored portfolios.
Cherry-Picking Scheme Revealed
The scheme began to unravel in 2023 when a WAMCO insider flagged irregularities in the trade allocation process. The SEC investigation revealed that Leech frequently delayed the allocation of trades until after the market had moved, allowing him to “cherry-pick” the best-performing trades for certain portfolios and the worst-performing trades for others. This was done through brokers, with whom Leech placed trades early in the trading day. However, instead of immediately confirming trade allocations, Leech delayed his decisions until the afternoon, when he had access to critical price information.
The SEC claims that Leech’s actions were a deliberate effort to shore up the performance of specific portfolios, including the Macro Opps strategy, which had seen a significant decline in assets under management due to poor investment decisions, such as a large bet on Russian debt that was decimated following the invasion of Ukraine.
SEC and U.S. Attorney’s Office Take Action
In addition to the SEC’s charges, the U.S. Attorney’s Office for the Southern District of New York has announced its own charges against Leech. The SEC’s complaint seeks permanent injunctions, financial penalties, disgorgement of ill-gotten gains, and a bar preventing Leech from serving as an officer or director of any public company.
Leech faces multiple criminal charges, including investment advisor fraud, securities fraud, and commodities fraud, each carrying potential prison sentences of up to 20 years. He is also charged with making false statements, which could lead to an additional five years in prison.
WAMCO Responds
According to the LA Times, WAMCO, which is owned by Franklin Resources Inc., has cooperated with the SEC and the U.S. Department of Justice’s investigations. In a statement, the firm emphasized that it had acted swiftly to address the situation and strengthen internal policies. WAMCO executives assured clients that the company had implemented changes to prevent similar incidents from occurring in the future and that the transition of responsibilities to other portfolio managers was already underway.
“We take this matter extremely seriously,” said Jeaneen Terrio, a spokesperson for WAMCO. “While this is a deeply concerning issue involving one individual, our team of investment professionals remains focused on serving our clients and upholding the integrity of our firm.”
The charges come after WAMCO disclosed the ongoing criminal and civil investigations earlier this year, causing a significant withdrawal of funds from the firm’s portfolios. Franklin Resources’ stock price dropped by 2.8% following the news.
