By Jonathan Stempel
NEW YORK (Reuters) – Kenneth Leech, the previous co-chief funding officer of Western Asset Administration Co, was criminally charged on Monday with operating a greater than $600 million “cherry-picking” scheme wherein he fraudulently favored some purchasers’ accounts over others when allocating trades.
The U.S. Legal professional’s workplace in Manhattan stated Leech, 70, was indicted by a federal grand jury on 4 counts of fraud and one depend of constructing false statements.
Leech was the face of Western Asset Administration, higher often known as Wamco, earlier than being positioned on depart in August when father or mother firm Franklin Assets (NYSE:) disclosed he was being investigated.
Leech additionally faces associated U.S. Securities and Change Fee civil fees. His lawyer referred to as the costs “unfounded” and stated Leech plans to defend himself vigorously.
Authorities stated the alleged scheme ran from January 2021 to October 2023, and concerned putting trades after which ready to see how they carried out earlier than allocating them to purchasers.
“The dimensions and length of Leech’s allegedly fraudulent conduct quantities to a surprising betrayal of his fiduciary obligations to his purchasers, who paid dearly for his transgressions,” Sanjay Wadhwa, performing director of the SEC enforcement division, stated in an announcement.
San Mateo, California-based Franklin Assets was not charged.
Purchasers pulled about $55 billion, or roughly 15% of Wamco’s belongings underneath administration, within the 4 months ending Oct. 31, with a lot of the outflows following Franklin’s disclosure of the investigation of Leech.
Franklin had Wamco by means of its buy of Legg Mason (NYSE:) in 2020.
RUSSIA, CREDIT SUISSE DEBT LOSSES
Authorities stated Leech improperly steered U.S. Treasury spinoff trades that carried out nicely on their first day to favored portfolios, whereas allocating worse-performing trades to different portfolios.
Leech allegedly favored portfolios following a “ Macro (BCBA:) Alternatives” technique, which he promoted as reflecting his finest concepts, and breached his duties to traders in portfolios following “Core” and “Core Plus” methods.
In keeping with the indictment, Leech grew to become significantly attuned to supporting Macro Alternatives portfolios after they suffered huge losses on Russian debt following Russia’s invasion of Ukraine in 2022, and on Credit score Suisse debt when the Swiss financial institution collapsed in 2023.
A mutual fund that Leech helped handle, Western Asset Core Plus Bond, has lagged a minimum of 98% of its friends within the newest one-year and three-year intervals, after largely outperforming since 2014, Morningstar knowledge present.
Prosecutors stated Leech additionally lied to the SEC by testifying that he knew the place he deliberate to allocate trades when he positioned them.
‘UNBLEMISHED RECORD,’ LAWYER SAYS
Jonathan Sack, a lawyer for Leech, in an announcement stated the costs ignored key variations amongst fixed-income methods and the “irrelevance” of first-day efficiency.
“Ken Leech has an unblemished document over practically 50 years as a dealer and portfolio supervisor,” Sack stated. “Mr. Leech obtained no profit from the alleged misconduct. We’re assured that he acted correctly always.”
Leech, of Pasadena, California, has till Dec. 6 to make an preliminary look in Manhattan federal courtroom.
The highest prison fees embody funding adviser fraud and securities fraud, every of which carries a most 20-year jail time period. Leech was additionally charged with commodity buying and selling adviser fraud, commodities fraud and making false statements.
On Nov. 4, Franklin stated the U.S. Commodity Futures Buying and selling Fee was additionally investigating the matter. Franklin additionally took a $389.2 million impairment cost for Wamco, resulting in an total quarterly loss.
Wamco spokeswoman Jeaneen Terrio stated the agency takes the matter “extraordinarily critically,” is continuous to cooperate with investigators, and has enhanced its buying and selling insurance policies and practices following an outdoor evaluate.
Shares of Franklin have fallen 24% this yr, considerably underperforming the broader market.
The prison case is U.S. v. Leech, U.S. District Courtroom, Southern District of New York, No. 24-cr-00658.
