SEC Charges Former WAMCO co-CIO With Fraud

Former Western Asset Management Co. LLC co-CIO Stephen Kenneth Leech has been charged in a $600 million fraud case for allegedly profiting from the allocation of favorable trades to certain clients at the cost of other clients.

The charges were levied by the Securities and Exchange Commission in U.S. District Court for the Southern District of New York on Monday. If convicted, Leech faces a maximum sentence of 20 years in prison, along with the permanent ban from the industry.

The move comes after the SEC said earlier this year it was initiating a probe of the potential scheme, known as cherry-picking, leading to Leech taking a leave of absence in August, with Michael Buchanan taking over as CIO. Buchanan had formerly been co-CIO with Leech.

Ken Leech

WAMCO, owned by Franklin Templeton, is a fixed-income manager overseeing over $381.1 billion in client assets.

The SEC’s complaint alleges that from at least January 2021 through October 2023, Leech placed trades with brokers and then waited to allocate the trades among client portfolios. According to the charges, that delay allowed him to observe price movements and allocate wins to some client portfolios, also profiting himself, and losses to other clients.

The gains to favored clients amounted to some $600 million, with that same amount going to disfavored clients, according to the claims.

“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,” Sanjay Wadhwa, the acting director of the SEC’s Division of Enforcement, said in a statement. “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.”

According to the U.S. attorney general’s office, the cherry-picking harmed institutional and retail investors who “trusted Leech to manage their savings and pension plans.”

As co-CIO, Leech was acting as a fiduciary for any investors in WAMCO’s Macro Opportunities fund and its Core and Core Plus funds, according to the attorney general. Despite that duty, he allegedly engaged in a scheme to bolster the Macro Opportunities fund at the expense of the Core funds.

“This was contrary to WAMCO’s compliance trainings, which emphasized that LEECH should allocate trades promptly, and against WAMCO’s policies, which prohibited allocating trades on the basis of first-day performance to make up for losses,” the attorney general’s office wrote.

The office also alleged that neither Leech nor WAMCO disclosed to clients the nature of the trading or that there was favoritism of the Macro Opportunities strategy.

“In all, between 2021 and October 2023, the U.S. Treasury futures and options trades LEECH allocated specifically to Macro Opps had net first-day gains of over $600 million,” the office stated. “By contrast, the U.S. Treasury futures and options trades LEECH allocated specifically to the Core Strategies had net first-day losses of over $600 million.”

An attorney representing Leech has disputed the charges in a statement and said Leech will defend himself in the case.

“Ken Leech has an unblemished record over nearly 50 years as a trader and portfolio manager,” Jonathan Sack, of Morvillo Abramowitz, said in a statement. “These unfounded allegations ignore key facts, including the fundamental differences between distinct fixed-income strategies and the irrelevance of first-day performance to managing these strategies. Mr. Leech received no benefit from the alleged misconduct.”

The investigation has seen clients pulls tens of billions of dollars from WAMCO bond funds, according to data from Bloomberg LP.

Parent company Franklin Templeton did not immediately respond to a request for comment.

The U.S. attorney’s office charged Leech with securities fraud, investment adviser fraud, commodity trading adviser fraud, commodities fraud and making false statements.