Western Asset Pays $100 Million to Resolve Federal Charges Tied to former Co-CIO

Western Asset Management Co. will pay a $100 million civil penalty to resolve federal charges tied to an alleged “cherry-picking” scheme involving its former co-chief investment officer Kenneth Leech.

In a filing with the U.S. Securities and Exchange Commission (SEC) on Friday, Western Asset’s parent Franklin Resources said the firm agreed to the settlement as a “business decision” to avoid prolonged litigation.

The agreement resolves investigations by the SEC and the U.S. Department of Justice without an admission of wrongdoing, Franklin said.

Leech, 71, is accused of running a “cherry-picking” scheme in which he placed trades and then waited until later in the day to decide how to allocate them among the client accounts he managed.

According to a federal complaint, Leech used the practice to offset losses in his marquee strategy by assigning trades that gained value during their first day to accounts tied to that strategy, while steering trades that declined over the same period to other clients—who were allegedly unaware they were being used to absorb losses to benefit favored accounts.

Federal prosecutors alleged that, between 2021 and 2023, Leech steered some $600 million in net first-day gains to favored clients, to benefit himself at the expense of disfavored clients who faced a similar amount of net first-day losses.

In announcing the settlement, the SEC said Western Asset failed to take reasonable steps to prevent the alleged misconduct. It also said the firm did not properly implement the policies and procedures it had established around reallocations.

The $100 million penalty will be placed into a fund for distribution to harmed investors, the SEC said.

Leech, who had worked at Western Asset for more than 30 years, faces criminal fraud charges as well as related SEC civil charges.

He has pleaded not guilty to the ⁠criminal charges, pending in the U.S. District Court for the Southern District of New York. The SEC’s civil case against him has been stayed while the criminal proceeding moves forward.

A jury trial for Leech originally planned for April 6 was postponed and is now scheduled to begin on June 15.

Franklin Resources itself was not charged. The San Mateo, California-based asset manager, which has about $1.78 trillion in assets overall, acquired Western Assets as part of the 2020 purchase of Legg Mason.

In 2024, after Leech took a leave of absence in the wake of federal charges, Franklin shuttered Western Asset’s flagship Macro Opportunities strategy, which had about $2 billion under management. It also elevated co-CIO Michael Buchanan to the sole CIO.