Former fund manager admits to obstructing SEC probe

Former Western Asset Management co-chief investment officer Ken Leech pleaded guilty to obstructing an investigation into a fraudulent trading scheme that disadvantaged certain clients.

At the US Attorney's Office for the Southern District of New York, Leech admitted to providing false and misleading testimony to the Securities and Exchange Commission (SEC), which was investigating his alleged favouritism to certain strategies and clients.

Authorities estimate that Leech allocated trades with first-day gains of about US$600 million to preferred strategies, while assigning roughly the same amount in first-day losses to other client accounts, despite owing a fiduciary duty to all investors.

Leech's conduct affected both institutional and retail clients, including those relying on him to manage savings and pension plans.

"Investment managers, like Leech, are entrusted by the SEC and the public at large to comply with their duty to be honest to regulators and fair to their clients," said Deputy US Attorney Sean S. Buckley.

"Leech willfully and intentionally gave false and misleading testimony to the SEC in an effort to obstruct an investigation into his fraudulent scheme to favour certain clients at the expense of others."

Days before entering the plea, the SEC slapped Franklin Templeton's Western AM with a US$100 million penalty for failing to detect and prevent its former staffer's cherry-picking scheme.

The watchdog found the fund manager failed to take reasonable steps to ensure Leech's actions were consistent with the firm's fiduciary duties and its disclosures to clients, including that its investment allocations would be done in a manner that was fair and equitable. The offending period ran from January 2021 through to October 2023.

At the criminal hearing, Leech was found to have "engaged in a criminal scheme commonly known as cherry-picking to compensate for losses in his marquee investment strategy by assigning trades that performed well during their first day into client accounts associated with that investment strategy."

He then assigned trades that performed poorly over their first day into the accounts of other clients, who were not aware that Leech was causing them losses to favour others.

Leech pleaded guilty to one count of obstructing justice, which carries a maximum sentence of five years' imprisonment. The sentencing is scheduled for September 21.

Buckley added the plea reflects the "commitment of this Office and its law enforcement partners to protecting everyday investors - in New York City and abroad - from investment advisers who violate their legal commitments and seek to deceive clients for their gain or the gain of others."

He credited the Federal Bureau of Investigation and the SEC for their roles in the investigation.