US regulators have laid formal fraud charges against former Western Asset Management (WAMCO) co chief investment officer, Ken Leech.
Both the Securities and Exchange Commission and the United States Attorney for the Southern District of New York are pursuing Leech through separate legal channels over sweetheart trading deals at the global fixed income powerhouse during a two-year period.
According to the criminal indictment unveiled in a New York court last week, the alleged fraud “victims included institutional and retail investors who trusted Leech to manage their savings and pension plans”.
“Over the course of his criminal scheme, Leech allocated trades with net first-day gains of at least approximately $600 million to his favored strategy and clients, and allocated trades with net first-day losses of at least approximately $600 million to clients to whom he owed an equal fiduciary duty,” the indictment says.
Using a practice known as ‘cherry-picking’ the former WAMCO star assigned winning first-day trades to the Macro Opportunities strategy while shifting the duds to two Core funds he also oversaw.
“Leech’s pattern of biased allocation was steady over the period relevant to this Indictment,” the release says. “In each of the 34 months between the beginning of 2021 and October 2023, the U.S. Treasury futures and options trades allocated specifically to Macro Opps had a net first-day gain. By contrast, over that same period, the U.S. Treasury futures and options trades that Leech allocated specifically to the Core Strategies had net first-day losses in all months except two.”
Where Leech did not influence the trades, and in particular after WAMCO relieved him of control of the Core strategies in October 2023, the Macro Opportunities fund “stopped having a consistent, pronounced bias toward first-day gain”, the indictment says.
Leech, who stepped down from WAMCO this August, faces a raft of criminal fraud charges under investment adviser, securities and commodities legislation as well as one count of making a false statement – each of which carries a maximum sentence of between five and 20 years in jail.
At the same time, the SEC has filed a civil case against Leech seeking “permanent and conduct-based injunctions, an officer-and-director bar, disgorgement, prejudgment interest, civil penalties, and other relief”.
Investors have pulled more than US$50 billion from WAMCO – a Franklin Templeton affiliate manager – since the scandal broke earlier this year, losing a number of institutional mandates such as long-standing allocations by Russell Investments in several global bond funds. The multi-manager is expected to name a WAMCO replacement shortly.
Russell also uses WAMCO as one of two underlying managers in the NZ fixed interest fund.
Franklin Templeton has since moved to integrate the bond manager “into its larger operations”, US media reported mid-November.