Securities fraud cases can take a long time to play out. It has been two years since the SEC sent a Wells Notice to Ken Leech, then the co-chief investment officer and a star bond fund manager at Western Asset Management Company, a fixed-income shop owned by Franklin Resources.
In June this year, Leech, who officially retired a year ago, pleaded guilty to obstructing the investigation into his alleged "cherry-picking" scheme. He admitted to giving "false and misleading testimony" to the Securities and Exchange Commission, which charged him in 2024 with participating in a $600 million fraud that favored certain clients through trade allocations at the expense of others, the Justice Department said.
The settlement brings some closure to the case that hung over the money manager and sparked defections among investors -- and a new report from investment research firm MPI suggests investors could have seen signs of problems in fund management long before the Wells notice arrived on Leech's desk.
MPI analyzed the portfolios of three Western funds at the center of the SEC and DOJ's probes -- Macro Opportunities, Core and Core Plus strategies -- during the period of January 2021 through October 2023, the focus of regulators during their investigations of Leech's managed and co-managed funds.
"The lesson is that when one senior PM or team manages multiple related products with overlapping opportunity sets, those products should not be reviewed only one by one," the MPI report says. "They should also be screened together."
For example, Macro Opportunities suffered sharp declines in performance in 2022 and 2023, and separately showed return behavior that "increasingly overlapped with the more traditional Core and Core Plus opportunity set," the report by MPI says.
"In the Western Asset/Leech case, the return record showed several patterns that, taken together, should have raised due-diligence questions: a star fund reversing sharply, Macro Opportunities developing more traditional core-bond exposure, Core and Core Plus [relative performance] deteriorating, and estimated [security] selection contribution diverging across related portfolios during the period later central to the SEC/DOJ allegations," the report says.
Leech, 72, pled guilty to one count of obstructing justice, which carries a maximum five-year prison sentence. He is scheduled to be sentenced on Sept. 21, according to the DOJ's announcement.
As for Western, which was also charged with "failing to take reasonable steps to detect and prevent its former co-Chief Investment Officer's alleged cherry-picking scheme," it settled with the SEC in June, agreeing to pay a $100 million civil penalty without admitting any wrongdoing. Western will distribute the funds to harmed investors, the SEC says.
Franklin upholds "the highest standards of compliance," says spokeswoman Jeaneen Terrio. Western Asset's compliance function has been integrated within Franklin Templeton's global compliance and governance organization, "strengthening the oversight framework, and including the adoption of Franklin's Global Trade Allocation Policy," Terrio says.
She says the firm doesn't plan to make changes in the Western Asset fund lineup and "remains committed to preserving the differentiated investment capabilities that clients have chosen."
Legal counsel for Leech did not respond for comment.
The Leech case, as well as fund underperformance, staff attrition and bond market headwinds, have negatively impacted Western's assets under management, a July Morningstar report found. Western's mutual fund AUM shrank from its peak of $92.9 billion in September 2021, to $14.8 billion as of this May. Meanwhile, firmwide AUM dropped from $483.5 billion as of September 2021 to $222.2 billion at the end of 2025, Morningstar says.
Moving forward. "There's been a lot of trust lost," in the Western brand, says Cathy Seifert, an analyst at CFRA Research. "Western and Franklin's assertion was that this was an isolated incident," Seifert says. "But [Leech] was not some rogue, junior or associate PM, he was the co-chief investment officer. He was a senior person. I think that speaks volumes about the lack of oversight."
Her advice in light of the fraud case: Prospective and existing Western investors should request detailed pre-trade allocation policies in writing from the money manager, before committing new funds to the firm. Investors should also request that an independent entity monitor investment compliance and that a third-party review all documentation, including investor communications, related to funds they may allocate to, she says.
Max Curtin, a senior manager research analyst for Morningstar, says that advisor and investor due diligence should generally include a close look at money managers' trading practices.
"From the outside looking in, it appeared [Leech] had a different set of standards for his trading practices from the rest of the firm, which led to concentrating too much risk to any one person," Curtin says. "It appeared his process was far more manual, which gave him more discretion on where to allocate trades."
The fact that this case involved bond funds may make it harder for Western to regain its stature among professional investors, Curtin says. "It's extremely hard to win back investor trust once you've lost it," he says, "especially when you think of the role of fixed income in asset allocation as a stabilizer and ballast in portfolios."
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