By Jack Pitcher
Federal prosecutors on Monday charged longtime bond investor Ken Leech with fraud, alleging he cherry-picked a series of trades to favor some clients while shifting losses to others.
Leech, the former chief investment officer and star trader at Franklin Templeton subsidiary Western Asset Management, allegedly assigned over $600 million in gains to favored clients and $600 million in losses to others, according to an indictment unsealed in Manhattan federal court Monday.
The Securities and Exchange Commission also charged Leech in a separate action. Leech's lawyer called the allegations "unfounded" in a statement.
The so-called cherry-picking scheme involved placing trades and then waiting until later in the day before allocating them in client accounts, after Leech saw how the trades were performing, the SEC said.
"This alleged behavior is an egregious abuse of power," Andrew Dean, co-chief of the SEC division of enforcement's asset management unit, said. "By hand-picking trades and sending them to portfolios he favored, Leech allegedly stood to profit personally and professionally."
The alleged scheme took place between January 2021 and October 2023, according to the SEC. The regulator said it was seeking a permanent injunction, which would prevent Leech from managing money again.
Franklin Templeton has been reeling from client outflows since disclosing that Leech was under investigation earlier this year. Leech was placed on leave in August, but remained an employee as of earlier this month.
Clients have pulled at least $55 billion from Wamco, as Western Asset is known, since the beginning of August, representing about 15% of its assets. Franklin acquired Wamco in 2020 as part of its broader deal for asset manager Legg Mason. Wamco was the crown jewel of the acquisition, and made up roughly a quarter of Franklin's assets earlier this year.
A spokeswoman for Franklin wasn't immediately able to comment.
Prosecutors charged Leech with investment adviser fraud and securities fraud, which each carry a maximum sentence of 20 years in prison. He was also charged with commodity trading adviser fraud, commodities fraud and making false statements.
In a statement, Leech's attorney Jonathan Sack said that Leech had an unblemished record over nearly 50 years as a trader and portfolio manager, and that they were confident he acted properly at all times.
"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 statement said.
Write to Jack Pitcher at jack.pitcher@wsj.com
(END) Dow Jones Newswires
November 25, 2024 18:25 ET (23:25 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
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