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Well-known bond investor Ken Leech was charged with criminal fraud on Monday for allegedly orchestrating a $600mn “cherry-picking” scheme that improperly allocated trades to particular portfolios at Western Asset Management.
The US Department of Justice alleged in a criminal indictment that Leech, then Western Asset Management’s co-chief investment officer, placed trades with brokers between January 2021 and October 2023, and then waited until later in the day to assign them to specific portfolios.
That resulted in $600mn net gains for his Macro Opportunities strategy and corresponding losses to two much larger “core” bond strategies that he also managed, prosecutors said. The US Securities and Exchange Commission also launched a parallel civil case against Leech.
Western has had a record $53bn in outflows since its owner Franklin Templeton disclosed an SEC investigation and put Leech on leave in August.
Of more than 500 trades that had first-day gains of more than $500,000, Leech allocated more than 90 per cent to Macro Opportunities, and conversely allocated more than 90 per cent of trades with big first-day losses to Core and Core Plus, according to 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 disfavoured portfolios and, in doing so, breached the fiduciary duties he owed to his clients and violated the antifraud and other provisions of the federal securities laws.”
Leech “accelerated his scheme” in March 2023, the SEC said, around the same time as he shifted millions of dollars of his own investments to the same accounts he was favouring.
Leech’s lawyer Jonathan Sack said Leech “received no benefit from the alleged misconduct” and planned to “defend himself vigorously.”
“Ken Leech has an unblemished record over nearly 50 years as a trader and portfolio manager,” Sack said. “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.”
Franklin, which has announced plans to change Western’s management structure, on Monday said: “We take this matter extremely seriously. The charges are centered on past trading by one individual . . . [The company] is continuing to fully co-operate with the government’s investigations.” Its share price is down 22 per cent this year.
The Macro Opportunities fund carried fees that were four times higher than those charged by the much-larger Core strategies, the indictment said. It once had as much as $14bn in assets but a large position in Russian debt was “nearly wiped out” after the country’s full-scale invasion of Ukraine in 2022, and a “significant investment” in Credit Suisse debt was washed out when that bank failed in 2023, the indictment said.
Leech, 70, faces a total of four fraud counts and one count of making false statements in the DoJ case.
