Western Asset Management Company, the Pasadena, California-based fixed-income unit of Franklin Resources, has agreed to pay a $100 million civil penalty to resolve Securities and Exchange Commission charges stemming from a trade allocation scheme orchestrated by its former co-chief investment officer, Stephen Kenneth Leech II.
The settlement, formalized through an SEC administrative order issued Friday under the Investment Advisers Act of 1940, also subjects Western Asset to a formal censure and a cease-and-desist order.
In a regulatory filing reported by Reuters, Franklin Resources said Western Asset agreed to the outcome as a "business decision" to avoid the distraction of prolonged litigation, adding that the resolution closes both the SEC investigation and a parallel inquiry by the U.S. Department of Justice.
According to the SEC administrative order, the $100 million penalty will be deposited into a fair fund and distributed to investors harmed in Western Asset's Core and Core Plus portfolios – the strategies at the center of the alleged misconduct.
As described in the SEC order, Leech, now 71, engaged in a cherry-picking scheme from January 2021 through October 2023. Cherry-picking – a form of fraud in which a portfolio manager delays trade allocations until after observing intraday price movements – allowed Leech to disproportionately steer trades with first-day net gains toward a set of favored portfolios, primarily within the firm's Macro Opportunities strategy, while directing trades with first-day losses to disfavored portfolios in the Core and Core Plus strategies.
The SEC found that Leech began trading as early as 5:00 a.m. Pacific time but routinely did not enter trade allocation instructions until after 12:00 p.m. Pacific – the point at which the relevant exchange set daily settlement prices. That gap, the regulator concluded, gave Leech the opportunity to observe market movement before determining which accounts received the winning and losing trades.
The firm's own compliance materials, including an August 2021 internal email from Western Asset's chief compliance officer cited in the SEC order, explicitly warned investment staff that delaying allocations created the risk of market-movement-influenced decisions and referenced three prior SEC enforcement actions involving similar conduct.
Despite that guidance, and despite awareness among supervisory and compliance personnel that Leech was not following the firm's allocation procedures, Western Asset failed to take reasonable steps to investigate or prevent the practice.
"Western Asset failed to take reasonable steps to detect and prevent this conduct by its former co-CIO," the SEC settlement document stated. "It was aware that Leech's trading and allocation practices diverged from those of other portfolio managers at the firm."
The SEC found Western Asset willfully violated Sections 206(2) and 206(4) of the Advisers Act – which prohibit fraudulent practices and require advisers to maintain adequate compliance policies – and failed to reasonably supervise Leech. Western Asset neither admitted nor denied the findings, as is standard in settled SEC proceedings.
For financial advisors who recommend or evaluate fixed-income funds, the settlement marks a formal close to a case that has reshaped one of the most prominent bond management franchises in the country.
The SEC first disclosed its investigation into Leech's conduct in August 2024, at which point Leech stepped down. In an earnings call months after, executives at Franklin Resources disclosed that approximately $120 billion exited Western Asset between that disclosure and January 2025 alone.
For the quarter ending December 31, 2024, Western reported nearly $68 billion in long-term net outflows – more than half of which occurred in December, following revelations of the SEC's civil complaint against Leech and the DOJ's parallel criminal case.
Leech has pleaded not guilty to the criminal charges, which remain pending in the United States District Court for the Southern District of New York. A judge stayed the SEC's civil action against Leech in January 2025 pending resolution of the criminal case.
As of December, Western Asset reported approximately $179 billion in assets under management in the United States, according to the SEC order – a dramatic reduction from the firm's prior scale. The broader fallout at Franklin Resources included a three percent reduction in the company's workforce, announced as the firm sought to stabilize its financial position.
The Western Asset settlement is among the larger civil penalties imposed on an investment adviser in recent years for trade allocation-related violations. Western Asset said it conducted its own investigation into Leech's conduct, retained an outside law firm, and has implemented additional policies and procedures governing trade allocation practices.
Franklin Resources has stated it remains committed to supporting Western Asset's operations while preserving the independence of its investment team, and that the settlement allows the firm to move forward without the ongoing distraction of regulatory proceedings.
“Wall Street is building dynamite and charging clients a fortune when they buy it,” one executive said.
Beyond rising client demand, firms and advisors with a focus on delivering tax alpha are in a better position to compete and thrive in the face of growing industry challenges.
Brokerages roll out real-time risk frameworks as $25,000 equity barrier falls after 25 years.
Some advisors are focused on moving assets. The families who trust us are worried about something far more important
While most women investors trust their advisors, new research points to “mansplaining” and other barriers that could undermine client relationships.
As $84 trillion prepares to change hands, advisors who treat estate planning as peripheral are quietly building a sieve, not a book.
In volatile markets, the advisors who win aren't the ones with the best calls - they're the ones whose clients stay the course.
