Ex-Wamco CIO Ken Leech Charged Over Trade Allocation Scheme

(Bloomberg) — Ken Leech, the former co-chief investment officer for Western Asset Management Co., was accused by US authorities on Monday of improperly allocating trades to favored clients in a dramatic turn for the once-star trader.

Leech, 70, was charged by federal prosecutors in Manhattan, who alleged that he allocated trades hours after executing them, often waiting until the end of the trading day or afterward, which went against the firm’s policies. The Securities and Exchange Commission filed a parallel civil lawsuit making similar allegations.

The US alleges the veteran portfolio manager stood to gain “professionally and financially” by parceling out winning trades to favored clients at the expense of others — a practice known as cherry-picking. Leech allegedly allocated more than $600 million of trades with net first-day gains to preferred portfolios and more than $600 million of trades with losses to disfavored ones, authorities said.

“The scale and duration of Leech’s allegedly fraudulent conduct amounts to a shocking betrayal of his fiduciary obligations to his clients, who paid dearly for his transgressions,” said Sanjay Wadhwa, acting director of the SEC’s Division of Enforcement. “Investment advisers are at all times obliged to perform their functions, including trade allocations, in a manner that puts their clients’ interests first. As alleged, Leech abdicated that all-important duty for years.”

Jonathan S. Sack, a lawyer for Leech, said the “unfounded” charges “ignore key facts, including the fundamental differences between distinct fixed-income strategies and the irrelevance of first-day performance to managing these strategies.”

“Ken Leech has an unblemished record over nearly 50 years as a trader and portfolio manager,” Sack said in a statement. “Mr. Leech received no benefit from the alleged misconduct. We are confident that he acted properly at all times, and Mr. Leech will defend himself vigorously.”

Investors have pulled tens of billions of dollars from Wamco funds since the firm disclosed the criminal and civil investigations this year. Leech took a leave of absence in August after the SEC warned he faced an enforcement action.

A spokesperson for Franklin Resources Inc., which owns Wamco, declined to immediately comment.

Leech was a dominant presence at Wamco for years and oversaw three of the firm’s main fixed-income strategies: Core, Core Plus and Macro Opportunities, which all at various moments had tens of billions of dollars in client assets.

The SEC accuses Leech of using the structure of the funds to  “maximize the performance” of the portfolios for Wamco and “increase his own bonus compensation.”

Leech’s annual bonus ranged from $28 million to $30 million per year between 2018 and 2020 when the firm was performing well, but dropped to $21 million in 2022 after its performance began to slump, the SEC said. In 2021, Leech’s cherry-picking “increased dramatically,” the agency said, to the benefit of portfolios that earned higher revenue. 

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

Leech joined Wamco in 1990 and became CIO eight years later. In the following two decades, he earned a reputation for making bold and often successful calls on interest rates and credit risk that helped build Wamco into a fixed-income giant. At the end of September, it had $353 billion in assets under management, down about $28 billion from the month before.

But Wamco hit a stretch of poor returns starting in late 2021 when Leech predicted the Federal Reserve would take its time raising rates. Investors pulled money as the firm’s returns trailed those of its peers.

Last October, Wamco began reviewing about 17,000 trades conducted by Leech between 2021 and 2023 after a company insider flagged abnormalities in the allocations, Bloomberg previously reported. The SEC and Justice Department probes followed.

Leech was charged with investment adviser fraud and securities fraud, each of which carries a maximum sentence of 20 years in prison; commodity trading adviser fraud and commodities fraud, both of which carry a top punishment of 10 years; and making false statements, which has a maximum penalty of five years.

Leech received a summons to appear in federal court in Manhattan by Dec. 6.

(Updates with further detail from SEC complaint and statement from prosecutors)

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