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Leech faces five criminal counts, SEC civil charges

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Allegedly favored some portfolios when allocating trades

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Leech to defend himself vigorously, lawyer says

(Adds details from indictment, performance of mutual fund, case

citation, background)

By Jonathan Stempel

NEW YORK, Nov 25 (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 ( BEN ) 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 ( BEN ) 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.