The US Securities and Exchange Commission has charged ex-high profile bond trade and Western Asset Management co-CIO Ken Leech with fraud.
The SEC’s complaint, filed in the United States District Court for the Southern District of New York, charges Leech with violating antifraud and other provisions of the federal securities laws, and seeks permanent and conduct-based injunctions, an officer-and-director bar, disgorgement, prejudgment interest, civil penalties, and other relief.
In a statement on 25 November the regulator said he engaged "in a multi-year scheme to allocate favorable trades to certain portfolios, while allocating unfavorable trades to other portfolios, a practice known as cherry-picking".
The SEC’s complaint alleges that from at least January 2021 through October 2023, Leech placed trades with brokers and then routinely waited until later in the trading day to allocate the trades among clients in the portfolios he managed.
According to the complaint, Leech’s delay between placing and allocating trades gave him the opportunity to observe price movements, and then disproportionally allocate trades at a first-day gain to favored portfolios and trades at a first-day loss to disfavored portfolios.
As alleged, Leech allocated hundreds of millions of dollars of net first-day gains to favored portfolios, which also benefited Leech personally, and a similar amount of net first-day losses to disfavored portfolios.
Sanjay Wadhwa, acting director of the SEC’s Division of Enforcement said: “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.
“Investment advisers are at all times obliged to perform their functions, including trade allocations, in a manner that puts their clients’ interests first. As alleged, Leech abdicated that all-important duty for years.”
“This alleged behavior is an egregious abuse of power,” said Andrew Dean, co-chief of the Division of Enforcement’s Asset Management Unit. “By hand-picking trades and sending them to portfolios he favored, Leech allegedly stood to profit personally and professionally.”
In a parallel action, the US Attorney’s Office for the Southern District of New York announced on 25 November charges against Leech.
In response to the statement, Jonathan S. Sack of Morvillo Abramowitz, counsel for Ken Leech stated: “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.
"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.”
The SEC’s investigation is ongoing.
