Bond trader at Pasadena firm shunted $600 million to favored portfolios, U.S. claims

At first blush, the U.S. case against star bond trader Ken Leech centers on a quirk in procedures: The former co-chief investment officer for Pasadena-based Western Asset Management Co. placed his daily bets, then let hours lapse before assigning them to client portfolios.

But for customers of Leech’s marquee Macro Opportunities strategy, trades that started off strong kept piling up in their ledgers, allegedly generating a whopping $600 million in first-day gains over less than three years — and now for Leech, criminal charges and regulatory claims. The alleged losers were two other strategies: Core and Core Plus.

In parallel cases announced late Monday, the Justice Department and U.S. Securities and Exchange Commission accused Leech, 70, of routinely waiting and assigning winning trades to accounts that produced the most revenue after he hit a rough patch in the market and faced pressure to shore up his reputation. With Leech receiving roughly half of the firm’s profits as cash bonuses, the uncanny pattern could also fatten his wallet, the SEC said.

“Statistically, the probability that these differences in first-day returns occurred by random chance is less than one in 1 trillion,� the agency wrote in its lawsuit.

Leech’s attorney disputed the government’s case as “unfounded,� saying his client acted properly at all times and would defend himself “vigorously.�

“Ken Leech has an unblemished record over nearly 50 years as a trader and portfolio manager,� said the lawyer, Jonathan S. Sack. The charges “ignore key facts, including the fundamental differences between distinct fixed-income strategies and the irrelevance of first-day performance to managing these strategies.� Leech received no benefit from the alleged misconduct, Sack added.

Investors pulled tens of billions of dollars from Wamco funds after the firm disclosed the criminal and civil investigations this year. Leech took a leave of absence in August after the SEC warned he faced an enforcement action.

A spokesperson for Wamco, which is owned by Franklin Resources Inc., said it’s cooperating with investigators. Shares of Franklin Resources fell 2.8% to $22.08 at 10:54 a.m. in New York.

The company sought to reassure clients in a note after the charges were filed against Leech. While Wamco said it was limited in what it could share, it stressed that it had acted quickly to respond to the crisis.

“We have a strong culture of compliance, as evidenced by the fact that this trading issue was identified internally and quickly escalated, and limitations on Ken Leech’s allocations were immediately implemented,� Wamco executives, including President James W. Hirschmann III, said in the note. “We also accelerated the transition of reporting and responsibilities to other portfolio managers, in line with the succession plan we announced in August 2023. Further, we immediately launched an external investigation and have subsequently fully cooperated with the government’s investigations.�

Cherry picking

The government’s narrative starts a few years ago when Leech headed into a career slump, hit by Federal Reserve interest rate moves and other outside forces that disproportionately hurt Macro Opps. A significant bet on Russian debt, for example, was almost wiped out after the country invaded Ukraine, according to prosecutors. He also oversaw an investment in Credit Suisse Group AG debt that suffered during the Swiss bank’s collapse.

Over a few years, Macro Opps’ assets under management sank by 80% to less than $3 billion — a black eye for Leech, who advertised it as reflecting Wamco’s best ideas, prosecutors said. As he set out to stop withdrawals, he allegedly resorted to cherry picking trades.

He typically started trading each day around 5 a.m. in California, often placing dozens of bets in general accounts with brokers through the session, according to the SEC. But breaking with practices at Wamco, he didn’t document or communicate allocations at the time of his trades, the agency said.

Instead, brokers would typically send confirmations to Wamco, and then a trading assistant would attempt to reach Leech by phone to get instructions about how to allocate the trades. Leech often wouldn’t respond for hours, the SEC said. At around 1 p.m. on the West Coast, as key markets wound down and trade settlement prices were determined, he and the assistant would discuss by phone how to allocate bets, the agency claimed.

The case caps a storied career. Leech joined Wamco in 1990 and became CIO eight years later. In the following two decades, he earned a reputation for making bold and often successful calls on interest rates and credit risk that helped build Wamco into a fixed-income giant.

His annual bonus ranged from $28 million to $30 million per year between 2018 and 2020, when the firm was performing well, but slipped to $21 million in 2022, the SEC said.

In 2023, according to the SEC, he increased his deferred compensation in the Macro Opps strategy while dropping the amount in the other two strategies. In one month alone, March 2023, he boosted his investment in Macro Opps to about $19 million from about $142,000, the agency said.

The SEC alleged that because of the differing fee structures in the three funds, each dollar of assets in the Macro Opps portfolios “could generate approximately four times as much revenue for Western Asset as each dollar in Core and Core Plus portfolios.�

In October 2023, Wamco began reviewing about 17,000 trades conducted by Leech between 2021 and 2023 after a company insider flagged abnormalities in the allocations, Bloomberg previously reported. The SEC and Justice Department probes followed.

“We take this matter extremely seriously,� Jeaneen Terrio, a spokesperson for Wamco, said in a statement. The company has strengthened policies and practices, she said.

And while the case is centered on one person, “our team of more than 100 investment professionals and outstanding client and operational support teams remain focused on serving clients,� Terrio said.

Leech was charged with investment advisor fraud and securities fraud, each of which carries a maximum sentence of 20 years in prison; commodity trading advisor fraud and commodities fraud, both of which carry a top punishment of 10 years; and making false statements, which has a maximum penalty of five years.

He received a summons to appear in federal court in Manhattan by Dec. 6.

Benny-Morrison, Brush and Dolmetsch write for Bloomberg.