By Jonathan Stempel
NEW YORK (Reuters) -Kenneth Leech, the former co-chief investment officer of Western Asset Management Co, was criminally charged on Monday with running a more than $600 million “cherry-picking” scheme where he fraudulently favored some clients’ accounts over others when allocating trades.
Leech, 70, was charged with four counts of fraud and one count of making false statements by the U.S. Attorney’s office in Manhattan, and also faces related U.S. Securities and Exchange Commission civil charges.
Franklin Resources (NYSE:BEN), the owner of Western Asset Management, better known as Wamco, was not charged.
Authorities said that between January 2021 and October 2023, Leech improperly steered U.S. Treasury derivative trades that performed well on their first day to favored portfolios, while allocating worse performing trades to other portfolios.
Investors were allegedly kept in the dark, and Leech allegedly lied to the SEC by testifying that he knew where he planned to allocate trades when he placed them.
“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, acting director of the SEC enforcement division, said in a statement.
Leech, of Pasadena, California, has until Dec. 6 to make an initial appearance in Manhattan federal court.
Jonathan Sack, a lawyer for Leech, in a statement said the “unfounded” charges ignored key differences among fixed-income strategies and the “irrelevance” of first-day performance.
“Ken Leech has an unblemished record over nearly 50 years as a trader and portfolio manager,” Sack said. “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.”
A spokeswoman for Franklin had no immediate comment.
Franklin acquired Wamco through its purchase of Legg Mason (NYSE:LM) in 2020, and placed Leech on leave earlier this year.
Leech had been the face of Wamco, but clients have pulled tens of billions of dollars from that business over the last few months after its San Mateo, California-based parent disclosed that authorities were investigating him.
Earlier this month, Franklin took a $389.2 million impairment charge related to Wamco, leading to an overall quarterly loss.
Shares of Franklin have fallen 24% this year, significantly underperforming the broader market.