Fund management firm Western Asset Management Company, LLC, agreed to pay US$100 million in a settlement with the U.S. Securities and Exchange Commission (SEC) to resolve allegations that it failed to supervise its former co-chief investment officer (CIO).
In 2024, the SEC charged the firm’s former co-CIO, Stephen Kenneth Leech II, with engaging in an alleged cherry-picking scheme between January 2021 and October 2023, which involved unfairly allocating trades with realized and unrealized gains to specific portfolios and allocating losing trades to other portfolios.
In a parallel criminal case, Leech was also charged by the U.S. attorney’s office for the Southern District of New York (SDNY) with securities fraud, investment advisor fraud, commodities fraud, commodity trading advisor fraud, and with making false statements in connection with allegations of cherry-picking that allegedly involved US$600 million in gains being directed to favoured clients, while US$600 million in losses were allocated to other clients.
In that case, Leech has pleaded not guilty to the criminal charges, and he is presumed to be innocent. The SEC’s charges haven’t been proven.
Now, the SEC has settled allegations against the firm, alleging that it violated federal rules by failing to properly supervise Leech.
According to the SEC’s order, at the time, Western Asset “was aware that Leech’s trading and allocation practices diverged from those of other portfolio managers at the firm.” However, it alleged that the firm failed to ensure that those practices were consistent with the firm’s fiduciary duties and its disclosures to its investors.
“While Leech’s daily trading volume was multiples of other PMs, he did not create instructions to allocate trades to specific portfolios at or near in time to his trades. Instead, following confirmations from brokers, Leech’s trades were routinely entered near or after the derivatives market set daily settlement prices,” the regulator alleged. “This practice gave Leech the opportunity to see whether the market value of his trades went up or down after trade execution.”
Additionally, the SEC alleged that the firm “failed to implement policies and procedures” to prevent violations of federal regulations and “failed reasonably to supervise Leech.”
Without admitting the SEC’s findings, the firm agreed to cease-and-desist, a censure and to pay a US$100-million penalty, which will be distributed to harmed investors.