MW How investigators say a star fund manager illegally took $600 million from some clients and steered it to others
By Lukas I. Alpert
Investigators say Ken Leech, who had $308 billion in assets under management, illegally cherry-picked assets and placed the good ones in one fund and poor performers in another
For some investors in WAMCO's funds, it paid to have friends. For others, not so much.
That's because Ken Leech, the star investor behind bond funds with $308 billion in assets under management, illegally steered hundreds of millions of dollars into ones held by preferred clients at the expense of funds held by less-favored customers, investigators say.
Federal prosecutors and the Securities and Exchange Commission said Monday that Leech, 70, of Pasadena, Calif., had for years engaged in what is known as cherry picking - buying bonds and waiting to see how they performed before assigning them various portfolios managed by his fund, Western Asset Management Company, LLC.
Investigators said that between 2021 and 2023, Leech steered $600 million in better-performing trades in WAMCO's Macro Opportunities fund while moving poorer-performing ones into the fund's Core Plus portfolios, costing its customers $600 million.
"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," said Sanjay Wadhwa, acting director of the SEC's Division of Enforcement. "Investment advisers are at all times obliged to perform their functions, including trade allocations, in a manner that puts their clients' interests first."
Leech's attorney, Jonathan Sack, said his client would "defend himself vigorously" against the charges.
"Ken Leech has an unblemished record over nearly 50 years as a trader and portfolio manager. 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," Sack said in a statement.
WAMCO is a division of Franklin Templeton $(BEN)$ , which acquired the fund in 2020 as part of its deal to buy Legg Mason. In July, Franklin Templeton acknowledged that WAMCO was under investigation by the Justice Department and the SEC, and in August said that Leech was being placed on a leave of absence after being informed he was under investigation.
Since then, investors have pulled about $55 billion out of WAMCO, or about 15% of its assets, the Wall Street Journal reported earlier this month.
Earlier this month, Franklin reported its first quarterly loss since 2017, partly due to a write-down of almost $400 million stemming from lower projected earnings at WAMCO.
A representative for Franklin Templeton and WAMCO had no immediate comment.
According to court documents, Leech, who started working at WAMCO as a portfolio manager in 1990 and rose to become its chief investment officer in 1998, would sometimes wait an entire day after executing a trade to see how the asset performed before allocating it to a certain fund, rather than making the allocations before acquiring the assets.
Prosecutors said this amounted to securities fraud. They also said Leech had steered his own assets into the Macro Opportunities fund so he benefited personally from its better performance.
"This alleged behavior is an egregious abuse of power," said Andrew Dean, co-chief of the SEC's enforcement division's asset-management unit. "By hand-picking trades and sending them to portfolios he favored, Leech allegedly stood to profit personally and professionally."
Victims of the scheme included large-scale pension funds as well as retail investors, investigators said.
-Lukas I. Alpert
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(END) Dow Jones Newswires
November 25, 2024 20:40 ET (01:40 GMT)
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