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Well-known bond investor Ken Leech was charged Monday with criminal fraud for allegedly orchestrating a $600 million “cherry-picking” scheme that improperly allocated trades to certain portfolios at Western Asset Management.
The U.S. Department of Justice alleged in a criminal complaint that Leech, then co-chief investment officer of Western Asset Management, placed trades with brokers between January 2021 and October 2023 and then waited until later in the day to allocate them to specific portfolios .
That resulted in a net gain of $600 million for his Macro Opportunities strategy and corresponding losses on two much larger “core” bond strategies that he also managed, prosecutors said. The U.S. Securities and Exchange Commission also launched a parallel civil case against Leech.
Western has seen a record $53 billion in outflows since owner Franklin Templeton announced an SEC investigation and put Leech on leave in August.
Of the more than 500 trades with first-day profits exceeding $500,000, Leech allocated more than 90 percent to Macro Opportunities, and conversely more than 90 percent of the trades with large first-day losses to Core and Core Plus. on the indictment handed down in Manhattan.
“The statistical probability that this pattern occurred by random chance is less than one in one trillion,” the SEC said. “Leech effectively stole assets from disadvantaged portfolios, breaching the fiduciary duties he owed to his clients and violating anti-fraud and other provisions of the federal securities laws.”
Leech “accelerated his scheme” in March 2023, the SEC said, around the same time he transferred millions of dollars of his own investments into the same accounts he favored.
Leech’s attorney Jonathan Sack said Leech “received no benefit from the alleged misconduct” and planned to “defend himself vigorously.”
“Ken Leech has an impeccable track record as a trader and portfolio manager for nearly 50 years,” said Sack. “These baseless allegations ignore important facts, including the fundamental differences between different fixed income strategies and the irrelevance of day one performance for managing these strategies.”
Franklin, who has announced plans to change Western’s management structure, said Monday: “We are taking this matter very seriously. The fees are based on past transactions by one person. . . [The company] continues to cooperate fully with the government’s investigation.” The share price has fallen 22 percent this year.
The Macro Opportunities fund had fees four times higher than the much larger Core strategies, the complaint said. The country once had as much as $14 billion in assets, but a large position in Russian debt was “almost wiped out” after the massive invasion of Ukraine in 2022, and a “significant investment” in Credit Suisse debt was wiped out when that bank failed in 2023, the indictment said.
Leech, 70, faces a total of four fraud charges and one charge of making false statements in the DoJ case.