Ex-Wamco CIO Ken Leech accused of trade allocation scheme

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

Leech, 70, was charged by federal prosecutors in Manhattan, who alleged that he assigned trading hours after executing them, often waiting until the end of the trading day or beyond, in violation of company policy. The Securities and Exchange Commission filed a parallel civil lawsuit making similar allegations.

The US claims the veteran portfolio manager could profit “professionally and financially” by distributing winning trades to favored clients at the expense of others – a practice known as ‘cherry-picking’. Leech allegedly allocated more than $600 million in first-day net gain trades to favored portfolios and more than $600 million in loss trades to unfavorable portfolios, authorities said.

“The extent and duration of Leech’s alleged fraudulent conduct amounts to a shocking betrayal of his fiduciary duties to his clients, who paid a heavy price for his transgressions,” said Sanjay Wadhwa, Acting Director of the SEC’s Division of Enforcement . “Investment advisors are at all times required to perform their duties, including trading allocations, in a manner that puts the best interests of their clients first. As alleged, Leech has been abdicating that vitally important duty for years.”

Jonathan S. Sack, an attorney for Leech, said the “baseless” allegations “ignore important facts, including the fundamental differences between different fixed income strategies and the irrelevance of day one performance for managing these strategies.”

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

Investors have pulled tens of billions of dollars from Wamco funds since the company made public the criminal and civil investigations this year. Leech took a leave of absence in August after the SEC warned he was facing enforcement action.

A spokesman for Franklin Resources Inc., owner of Wamco, declined to immediately comment.

Leech was a dominant presence at Wamco for years, overseeing three of the firm’s key fixed income strategies: Core, Core Plus and Macro Opportunities, all of which at various times held tens of billions of dollars in client assets.

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

Leech’s annual bonus ranged from $28 million to $30 million a year between 2018 and 2020, when the company was performing well, but fell to $21 million in 2022 after performance began to decline, the SEC said. In 2021, Leech’s cherry-picking “increased dramatically,” the agency said, favoring portfolios that earned higher income.

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

Leech joined Wamco in 1990 and became CIO eight years later. Over the next twenty years, he earned a reputation for making bold and often successful statements on interest rates and credit risk, helping Wamco grow into a fixed income giant. At the end of September, the company had $353 billion in assets under management, about $28 billion less than the previous month.

But Wamco had a string of poor returns starting in late 2021, when Leech predicted the Federal Reserve would take its time raising rates. Investors raised money as the company’s returns lagged those of its peers.

Last October, Wamco began reviewing about 17,000 trades Leech executed between 2021 and 2023 after a company insider noticed anomalies in the allocations, Bloomberg previously reported. SEC and Justice Department investigations followed.

Leech was charged with investment advisor fraud and securities fraud, each punishable by up to 20 years in prison; commodity trading consultant fraud and commodity fraud, both of which carry a 10-year prison sentence; and making false statements, which carries a maximum penalty of five years.

Leech received a summons to appear in federal court in Manhattan on December 6.

(Updates with further details of the SEC complaint and statement from prosecutors)

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