NEW YORK (Reuters) -Kenneth Leech, the former co-chief investment officer of Western Asset Management Co, was criminally charged on Monday with running a more than $600 million "cherry-picking" scheme in which he fraudulently favored some clients' accounts over others when allocating trades.

The U.S. Attorney's office in Manhattan said Leech, 70, was indicted by a federal grand jury on four counts of fraud and one count of making false statements.

Leech was the face of Western Asset Management, better known as Wamco, before being placed on leave in August when parent company Franklin Resources disclosed he was being investigated.

Leech also faces related U.S. Securities and Exchange Commission civil charges. His lawyer called the charges "unfounded" and said Leech plans to defend himself vigorously.

Authorities said the alleged scheme ran from January 2021 to October 2023, and involved placing trades and then waiting to see how they performed before allocating them to clients.

"The scale and duration of Leech's allegedly fraudulent conduct amounts to a shocking betrayal of his fiduciary obligations to his clients, who paid dearly for his transgressions," Sanjay Wadhwa, acting director of the SEC enforcement division, said in a statement.

San Mateo, California-based Franklin Resources was not charged.

Clients pulled about $55 billion, or approximately 15% of Wamco's assets under management, in the four months ending Oct. 31, with much of the outflows following Franklin's disclosure of the investigation of Leech.

Franklin had Wamco through its purchase of Legg Mason in 2020.

RUSSIA, CREDIT SUISSE DEBT LOSSES

Authorities said Leech improperly steered U.S. Treasury derivative trades that performed well on their first day to favored portfolios, while allocating worse-performing trades to other portfolios.

Leech allegedly favored portfolios following a "Macro Opportunities" strategy, which he promoted as reflecting his best ideas, and breached his duties to investors in portfolios following "Core" and "Core Plus" strategies.

According to the indictment, Leech became particularly attuned to supporting Macro Opportunities portfolios after they suffered big losses on Russian debt following Russia's invasion of Ukraine in 2022, and on Credit Suisse debt when the Swiss bank collapsed in 2023.

A mutual fund that Leech helped manage, Western Asset Core Plus Bond, has lagged at least 98% of its peers in the latest one-year and three-year periods, after largely outperforming since 2014, Morningstar data show.

Prosecutors said Leech also lied to the SEC by testifying that he knew where he planned to allocate trades when he placed them.

'UNBLEMISHED RECORD,' LAWYER SAYS

Jonathan Sack, a lawyer for Leech, in a statement said the charges ignored key differences among fixed-income strategies and the "irrelevance" of first-day performance.

"Ken Leech has an unblemished record over nearly 50 years as a trader and portfolio manager," Sack said. "Mr. Leech received no benefit from the alleged misconduct. We are confident that he acted properly at all times."

Leech, of Pasadena, California, has until Dec. 6 to make an initial appearance in Manhattan federal court.

The top criminal charges include investment adviser fraud and securities fraud, each of which carries a maximum 20-year prison term. Leech was also charged with commodity trading adviser fraud, commodities fraud and making false statements.

On Nov. 4, Franklin said the U.S. Commodity Futures Trading Commission was also investigating the matter. Franklin took a $389.2 million impairment charge for Wamco, leading to an overall quarterly loss.

A spokeswoman for Franklin had no immediate comment on Monday.

Shares of Franklin have fallen 24% this year, significantly underperforming the broader market.

The criminal case is U.S. v. Leech, U.S. District Court, Southern District of New York, No. 24-cr-00658.