Ken Leech formally charged by SEC, US Attorney's Office

Former WAMCO co-chief investment officer Ken Leech is facing fraud charges for alleged cherry picking amounting to $600 million, the SEC and US Attorney’s Office for the Southern District of New York announced Monday.

The charges were expected following a notice the Securities and Exchange Commission provided earlier this year ahead of the action, causing Leech to step down from his role at the former Legg Mason affiliate that is now part of Franklin Templeton.

The SEC alleges that between January 2021 and October 2023 Leech allocated hundreds of millions of dollars in net first-day trade gains to clients he favored and divvied out corresponding losses to others. That practice, which was possible because of his delay between placing and allocating trades, is known as cherry picking.

“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, in a statement. “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.”

The alleged cherry picking affected both retail and institutional investors, including those in savings and pension plans, the US Attorney's Office stated in its announcement.

“Over the course of his criminal scheme, Leech allocated trades with net first-day gains of at least approximately $600 million to his favored strategy and clients, and allocated trades with net first-day losses of at least approximately $600 million to clients to whom he owed an equal fiduciary duty,” the office stated.

One of the portfolios that benefited from the alleged cherry picking was WAMCO’s Macro Opportunities strategy, at the cost of performance in its flagship Core and Core Plus strategies, the office said.

An attorney representing Leech disputed 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. Mr. Leech received no benefit from the alleged misconduct," said Jonathan Sack of Morvillo Abramowitz, in a statement provided by a public relations firm. "We are confident that he acted properly at all times, and Mr. Leech will defend himself vigorously.”

Since the investigation by the regulator and Department of Justice became public, investors have pulled tens of billions of dollars in assets from WAMCO funds. The company, which has long provided fixed-income management for institutional clients around the world, became part of Franklin Templeton after its former parent, Legg Mason, was acquired in 2020.

Franklin did not immediately respond to a request for comment Monday evening.

The Western Asset Core Bond Fund represented over $5.3 billion in assets as of the end of October, less than half of what it did a few months earlier. Meanwhile, its Core Plus Bond Fund dropped from about $19 billion to $10 billion.

In its complaint, the SEC charged Leech with violating antifraud provisions and other parts of federal securities laws, seeking injunctions, having him barred from the industry, disgorgement, prejudgment interest, civil penalties, and other monetary relief.

The US Attorney’s Office charged Leech with securities fraud, investment adviser fraud, commodity trading adviser fraud, commodities fraud, and making false statements.