Former Wamco CIO Ken Leech charged over trade distribution scheme

(Bloomberg) — Ken Leech, the former co-chief investment officer of Western Asset Management, was charged by U.S. authorities on Monday with improperly allocating trades to favored clients, a blow to the one-time star trader. It’s a dramatic transformation.

Leech, 70, was charged by federal prosecutors in Manhattan alleging that he violated company policy by allocating trades hours after they were executed, often waiting until the end of the trading day or later. The Securities and Exchange Commission filed a parallel civil lawsuit making similar allegations.

The US alleges that the veteran portfolio manager benefited “professionally and financially” by allocating winning trades to favored clients at the expense of other clients, a practice known as “cherry picking” . Leech allegedly allocated more than $600 million in first-day net gain trades to the preferred portfolio and more than $600 million in loss-making trades to the unfavorable portfolio, authorities said.

Sanjay Wadhwa, Acting Director of the SEC’s Enforcement Division, said: “The scale and duration of Leech’s alleged fraud were a shocking betrayal of his fiduciary duty to his clients, who paid for his illegal conduct. “Investment advisers are always obligated to perform their functions, including trade allocations, in a manner that puts their clients’ interests first,” Leach said. ”

Leech’s attorney, Jonathan S. Sack, said the “baseless” accusations “ignored key facts, including the fundamental differences between different fixed-income strategies and the differences between first-day performance and management of those strategies. irrelevance.”

“Ken Leech has an impeccable record as a trader and portfolio manager spanning nearly 50 years,” Thacker said in a statement. “Mr. Leech has gained nothing from the alleged misconduct.” Benefit. We believe he acted correctly at all times and Mr. Leach will vigorously defend himself.”

Since Wamco disclosed criminal and civil investigations this year, investors have withdrawn tens of billions of dollars from the company’s funds. Leech took a leave of absence in August after the SEC warned him he faced enforcement action.

A spokesman for Wamco’s parent company, Franklin Resources, declined immediate comment.

Leech has been a leading figure at Wamco for many years, overseeing the firm’s three main fixed-income strategies: Core, Core Plus and Macro Opportunities, which at various times had tens of billions of dollars in client assets.

The SEC alleges that Leech used the fund structure to “maximize” the performance of Wamco’s portfolio and “increase his own bonus compensation.”

The SEC said that from 2018 to 2020, when the company performed well, Leech’s annual bonus was between $28 million and $30 million, but after performance began to decline in 2022, the bonus was reduced to $21 million. Leech’s picks “increased sharply” in 2021, favoring higher-income portfolios, the agency said.

In 2023, he increased deferred compensation in the Macro Opps strategy while lowering the amounts in two other strategies, according to the SEC. In just one month, in March 2023, he increased his investment in Macro Opps from about $142,000 to about $19 million, the agency said.

Leech joined Wamco in 1990 and became chief information officer eight years later. Over the next two decades, he earned a reputation for making bold and often successful decisions on interest rates and credit risk, helping to build Wamco into a fixed-income giant. As of the end of September, its assets under management were US$353 billion, a decrease of approximately US$28 billion from the previous month.

But Wamco has suffered a period of poor returns starting in late 2021, when Leech predicted the Federal Reserve would slowly raise interest rates. Investors pulled money as the company’s returns lagged those of its peers.

In October last year, Wamco began reviewing about 17,000 transactions made by Leech between 2021 and 2023 after a company insider pointed out anomalies in the allocations, Bloomberg previously reported. The U.S. Securities and Exchange Commission and the Department of Justice subsequently launched investigations.

Leech was charged with investment adviser fraud and securities fraud, each of which is punishable by up to 20 years in prison; commodity trading adviser fraud and commodities fraud, which is punishable by up to 10 years in prison; and making false statements, which is punishable by up to five years in prison.

Leech was issued a subpoena on December 6 to appear in Manhattan federal court.

(Updated with more details from SEC complaint and prosecutor’s statement)

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