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 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.
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 making other decisions 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.
