Former WAMCO Exec Leech Pleads Not Guilty to Cherry-Picking Allegations

Ken Leech, former CIO of fixed-income manager Western Asset Management Co., has pleaded not guilty to charges that he helped certain clients profit from favorable trades at the expense of other clients, who suffered losses.

Leech was charged with fraud by the Securities and Exchange Commission and the Department of Justice in November. He pleaded not guilty to all charges at a hearing in U.S. District Court for the Southern District of New York on Monday. Earlier, he was granted $10 million bail and was released on bond, according to a spokesperson for the Southern District of New York.

According to the SEC complaint, between January 2021 and October 2023, Leech assigned winning trades to favored clients, netting a total of $600 million for clients. Unfavored clients lost $600 million, according to the complaint.

Leech, 70, of Pasadena, California, was charged with one count of investment adviser fraud and one count of securities fraud. Both charges carry a maximum penalty of 20 years in prison. Additionally, Leech was charged with one count of commodity trading adviser fraud and one count of commodities fraud, each carrying a maximum sentence of 10 years in prison, and one count of making false statements, carrying a maximum sentence of five years.

Attorneys for Leech had no further comment on Leech’s plea. In November, Jonathan Sack, of Morvillo Abramowitz Grand Iason & Anello P.C., counsel for Leech, said in a statement the allegations were unfounded and that Leech would defend himself vigorously.

Leech is accused of placing trades with brokers and then waiting to allocate them across portfolios. Leech was able to observe price movements with the delay and then allocate winning trades to favored portfolios.

“The statistical probability that this pattern occurred by random chance is less than one in one trillion,” according to the SEC complaint.

Leech was a portfolio manager for numerous portfolios, including the “Macro Opportunities” strategy and the WAMCO “Core” and “Core Plus” strategies. Leech is accused of making favorable trades to the Macro Opportunities strategy, while unfavorable trades were made to the Core strategies.

At certain times during the relevant period, Core had more than $44 billion in assets under management, while Core Plus had more than $122 billion in AUM. As of June 30, the strategies had $31.1 billion and $66.8 billion, respectively, in AUM, according to the SEC claim.

Macro Opportunities had more than $13 billion in AUM at one point. Despite being a smaller portfolio, Macro Opportunities had higher management and performance fees. Core and Core Plus clients paid between five and 45 basis points of portfolio market value in fees, while Macro Opps clients paid between 40 and 115 bps.

“Because of this difference in fee structures, each dollar of AUM in Macro Opps portfolios could generate approximately four times as much revenue for Western Asset as each dollar in Core and Core Plus portfolios,” the SEC complaint stated.

“Leech routinely waited hours after making his trades—often until late in the day—to make his allocations, allowing him to observe how his trades had performed before deciding where to allocate them. Between 2021 and October 2023, Leech used that ability to see how the market moved to support Macro Opps by awarding it better performing trading and hiding worse performing trades in the Core Strategies,” a statement from the Department of Justice said.

Macro Opportunities was not without losses, however. Some of the losing investments in Macro Opportunities included Russian debt, which was nearly wiped out in early 2022 following the invasion of Ukraine, and Credit Suisse debt, which was completely wiped out when the bank collapsed in 2023. Over the 2021 to 2023 period during which Leech is accused of running the scheme, assets under management in the Macro Opportunities strategy fell by 80%, dropping to less than $3 billion, according to the SEC complaint.

To mitigate losses in the Macro Opportunities strategy, Leech told clients to stay invested in the strategy by “claiming Macro Opps typically recovered quickly after suffering losses,” the complaint stated. As of October 29, the Macro Opps strategy ceased operations and was liquidated.

As a result of the allegations, institutional clients, including the Illinois Municipal Retirement Fund, the Chicago Teachers’ Pension Fund and the Kern County Employees’ Retirement Association, terminated WAMCO as a manager. WAMCO, a subsidiary of Franklin Templeton, this month appointed Thomas Gahan as the firm’s new CEO. Gahan came from Benefit Street Partners, another subsidiary of Franklin Templeton.