Wamco customers and employees are leaving as Ken Leech goes to court

(Bloomberg) — On the surface, everything looked rosy for Occidental Asset Management, which celebrated the New Year by inviting its employees and clients to watch the Rose Parade from the Wamco balcony in Pasadena, Calif., decorated with company flowers. cheers at the entrance. “Float like a butterfly.” The theme of the parade is “Best Day Ever!”

Today, for Wamco’s star bond trader Ken Leech, the story is different. He is scheduled to appear in Manhattan federal court on Monday on fraud charges that have rocked the investment firm and spilled over into its owner, Franklin Resources. Pension funds and other big clients have withdrawn huge sums of money since the investigation into his dealings was revealed in August. About $65 billion to date, with more withdrawals on the way.

Inside Wamco, employees are struggling to keep the company afloat without much guidance from top management and worried about whether they should quit, according to more than a dozen people familiar with the matter. Jim Hirschmann, Wamco’s leader for more than two decades, has rarely been seen at the Pasadena headquarters, while Franklin CEO Jenny Johnson has only been there since Leach was charged. Brief comments were made in public.

“This is a difficult situation,” Johnson acknowledged at a Bloomberg conference in London last week. “It never does much good to talk publicly about government investigations.”

Wamco abruptly replaced Hirschman, 64, as CEO this month and moved him to the newly created position of chairman. The change comes after U.S. authorities alleged that Leech, Wamco’s former co-chief investment officer, often waited until later in the day to allocate profitable trades to accounts that generated the most revenue, leaving other customers with the burden of losses.

The indictment late last month is a huge setback for Franklin, which had been counting on acquiring Wamco parent Legg Mason in 2020 to expand its business and stem a continued outflow of assets. Active managers like Franklin have been losing ground to low-cost index fund providers. Bloomberg Intelligence said at the time of the deal that it could be “the key to Franklin’s survival.”

Instead, the acquisition – which allowed Wamco to continue operating independently of Franklin – has turned into a financial and reputational fiasco. Franklin has taken about $390 million in writedowns on Wamco’s mutual fund business, which is facing outflows and the specter of its big-name managers appearing in federal court. The stock is down more than 25% this year.

Hirschman has not been accused of wrongdoing in the federal case. “Western Asset is a global company with offices on multiple continents,” a Wamco representative said. “Like any CEO, Jim spends part of his time traveling to other Western offices and meeting with clients around the world.”

Leech is on leave from Wamco and plans to contest the charges, which his attorneys say are baseless.

Johnson described the incident as an isolated incident — “It was one person,” she told attendees — and said Franklin was cooperating with investigators. She’s counting on Wamco’s remaining employees to turn things around.

“The bottom line is we still have a lot of clients invested in Western assets,” Johnson said. “So we’re making sure that the investment team is not affected by a lot of what happens in the investigation so that we can make sure that they’re managing their clients’ money and focused on that.”

For some, it’s too late. The defectors on the client list include the Marin County Employees’ Retirement Association, a client of the association for more than two decades with assets of about $340 million. Illinois municipal pension funds have nearly $1 billion left.

Hundreds of millions more have been raised by the Ohio Department of Workers’ Compensation, the Chicago Teachers’ Pension Fund, the Dallas Employees’ Retirement Fund and the Anne Arundel County Retirement System. Some who remain, including Fresno County Employees Retirement Association of California, are interviewing replacements.

The workforce is also deteriorating. At least two department heads have left, and rival asset managers are being inundated with resumes from Wamco employees, according to people familiar with the matter.

Several people who spoke on condition of anonymity to protect their jobs and relationships said the atmosphere at Wamco was tense and lacking direction, so a complete takeover of the business by Franklin would be a welcome outcome. Some people familiar with the matter said employees came to work early in the morning knowing they might just hit the “sell” button to raise the cash needed to pay off departing customers.

For asset managers like Franklin, this dissatisfaction is no small matter. “People can get out of their homes,” Johnson told a Bloomberg conference. “It’s different from a lot of other types of businesses.”

On the day Rich was indicted, Hirschman and two executives wrote to clients saying Wamco had upgraded its compliance systems and was “taking steps to invest in key personnel on our investment team and broader support functions, focusing on to retain talent to ensure business continuity.” The high quality service you expect. ”

Some executives who were informed of bonuses in recent weeks were also informed of a retention package, people familiar with the matter said. Others wondered whether they would receive similar encouragement or whether it was worth sticking around given the fear of being affected by Wamco’s woes.

Interviews with people who have worked with Leach show that he was a towering figure both internally and externally, in part because of his mastery of the market and his love of history. He shunned the spotlight, refusing interviews and television commercials. Instead, he leads the firm’s investment team, providing views on the economy and bonds, inflation and the health of financial companies around the world, including the United States, Mexico, Russia and beyond.

All he loved to do was trade—and did it often. In order to catch up with the opening of the New York market, Leach himself would conduct dozens of trades every day, sometimes from his office or home away from the trading floor, people familiar with the matter said. Insiders would sometimes wonder what Leach was doing before finding him on the trading floor or calling an assistant at the end of the day to direct which accounts had taken his trades. Other traders use the company’s technology systems to accomplish this task.

According to court documents, Leach failed to comply with the company’s own compliance training and U.S. law, which require timely distribution of transactions. Authorities allege that over the course of 34 months, Leech “selected” winning trades based on first-day gains and losses, depositing more than $600 million of them into the company’s most profitable accounts and those that allowed him to The wallet benefits the account. These unwelcome customers allegedly pocketed more than $600 million in lost bets.

His lawyer, Jonathan Thacker, said the charges “ignored key facts, including the fundamental differences between different fixed-income strategies and the irrelevance of first-day performance to managing those strategies.” More importantly, he said, Lee Qi did not benefit from the alleged misconduct.

Hirschman’s Leadership

While Leech was the trading brains, Hirschmann, who started the business a year before Leech in 1989, was the customer and salesperson who helped propel the company to prominence, especially in the 1990s and early 2000s.

Hirschman hasn’t held a major role in the company for some time. According to some interviewees, he frequently traveled with clients on business or on private jets. When he arrives at the Pasadena headquarters, he arrives in his own special van and takes a rarely used private elevator to his fifth-floor office.

Hirschman rarely set foot on the trading floor, but he focused on the physical aspects of the office, personally choosing the carpet color for the Wamco conference room and the snacks sold in the cafeteria, people familiar with the matter said. One employee in London remembers that when Hirschman visited, all the blinds had to be drawn to the same level.

Wamco’s decline is dramatic for Wamco. Wamco is a well-established bond manager that once rivaled the likes of Pacific Investment Management Co. and BlackRock Inc. Founded in 1971, Wamco was one of the first West Coast fixed income companies to be bullish on the bond market for decades. Money was flowing in from investors in the U.S. and overseas, and bonuses were generous. Leach himself was recently making nearly $30 million a year.

When Johnson acquired Wamco parent company Legg Mason in 2020, Wamco had become the crown jewel and Leech had become a star manager. The acquisition includes a commitment to Wamco’s autonomy, which expires in 2025.

This independence has already been demonstrated to some extent. Johnson and Hirschman told a company town hall via video rather than in person that middle and back-office functions will be more fully integrated into Franklin. New company-wide technology is set to be rolled out soon, and Wamco insiders are speculating whether the new regime heralds changes to the actual trading and investing departments.

Franklin representatives now outnumber Wamco managers on calls with big customers, people familiar with the matter said. They are constantly being asked about Wamco’s future, potential layoffs, who will pay legal costs and fines.

Given the amounts involved, legal action may be taken against the company. Fernando Vinzons, chief information officer of the Chicago Teachers Fund, which has raised $550 million, said the fund is “evaluating all available options.”

Hirschman said in a Dec. 3 memo that the company looks forward to introducing customers to Tom Gahan, who will succeed him as CEO. But Franklin’s public statements did not include the transition period that typically accompanies leadership changes. The company said Hirschman’s transition was “effective immediately.”

“Jim played a key role in building Western Properties and his commitment to the business has not changed,” a Wamco spokesman said. As for the upcoming parade, the spokesman said Wamco has worked in Pasadena for dozens of Year, participating in this event is part of the company’s sense of civic responsibility.

Guests can arrive as early as 6:30 a.m. to enjoy a breakfast buffet, watch marching bands, equestrians and company floats roll by, and celebrate “the renewed opportunities that each new year brings,” the invitation said.

—With assistance from Francine Lacqua.

More stories like this can be found at Bloomberg.com