By Jonathan Stempel
NEW YORK (Reuters) – Kenneth Leech, former co-chief investment officer of Western Asset Management Co, was criminally charged on Monday with running a more than $600 million “shoring” scheme in which he fraudulently favored some clients’ accounts. instead of others when assigning operations.
The U.S. Attorney’s office in Manhattan said Leech, 70, was indicted by a federal grand jury on four counts of fraud and one count of making false statements.
Leech was the face of Western Asset Management, better known as Wamco, before being placed on leave in August when parent company Franklin Resources (NYSE 🙂 revealed it was being investigated.
Leech also faces related civil charges from the U.S. Securities and Exchange Commission. His attorney called the charges “baseless” and said Leech plans to vigorously defend himself.
Authorities said the alleged scheme ran from January 2021 to October 2023 and involved placing trades and then waiting to see how they performed before allocating them to clients.
“The scale and duration of Leech’s allegedly fraudulent conduct amounts to a shocking betrayal of his fiduciary obligations to his clients, who paid a heavy price for his transgressions,” Sanjay Wadhwa, acting director of the enforcement division, said in a statement. of the SEC.
Franklin Resources, based in San Mateo, California, was not charged.
Clients withdrew about $55 billion, or about 15% of Wamco’s assets under management, in the four months ended Oct. 31, with much of the outflows following Franklin’s disclosure of Leech’s research.
Franklin had Wamco through the purchase of Mason Legg (NYSE:) in 2020.
RUSSIA, CREDIT SUISSE DEBT LOSSES
Authorities said Leech improperly directed U.S. Treasury derivatives trades that performed well on their first day toward favored portfolios, while allocating worse-performing trades to other portfolios.
Leech allegedly favored handbags after a “ Macro (BCBA:) Opportunities”, which he promoted as a reflection of his best ideas, and failed to fulfill his duties towards investors in portfolios following the “Core” and “Core Plus” strategies.
According to the indictment, Leech became particularly attuned to supporting Macro Opportunities’ portfolios after they suffered large losses on Russian debt following Russia’s invasion of Ukraine in 2022, and on Credit Suisse debt when the Swiss bank collapsed in 2023.
A mutual fund Leech helped manage, Western Asset Core Plus Bond, has lagged its peers by at least 98% over the past one- and three-year periods, after vastly outperforming since 2014 , Morningstar data shows.
Prosecutors said Leech also lied to the SEC by testifying that he knew where he planned to allocate the trades when he made them.
‘Impeccable record,’ says lawyer
Jonathan Sack, Leech’s attorney, said in a statement that the charges ignored key differences between fixed income strategies and the “irrelevance” of day one performance.
“Ken Leech has an unblemished track record of nearly 50 years as a trader and portfolio manager,” Sack said. “Mr Leech did not receive any benefit from the alleged misconduct. We are confident that he acted correctly at all times.”
Leech, of Pasadena, California, has until December 6 to make an initial appearance in federal court in Manhattan.
The main criminal charges include investment advisor fraud and securities fraud, each of which carries a maximum prison sentence of 20 years. Leech was also charged with commodity trading advisor fraud, commodity fraud and false statements.
On Nov. 4, Franklin said the U.S. Commodity Futures Trading Commission was also investigating the matter. Franklin also took a $389.2 million impairment charge for Wamco, resulting in an overall quarterly loss.
Wamco spokeswoman Jeaneen Terrio said the company takes the matter “very seriously,” continues to cooperate with investigators and has improved its policies and business practices following an external review.
Franklin shares have fallen 24% this year, significantly underperforming the broader market.
The criminal case is US v. Leech, U.S. District Court, Southern District of New York, No. 24-cr-00658.