Franklin Templeton's Western AM hit with US$100m penalty

Franklin Templeton's Western Asset Management has been hit with a whopping US$100 million penalty for failing to detect and prevent its former co-chief investment officer's alleged cherry-picking scheme.

The order follows the SEC's 2024 action against former Western AM co-chief investment officer Ken Leech, alleging he engaged in a multi-year scheme to allocate favourable trades to certain portfolios, which conversely allocated unfavourable trades to other portfolios.

The regulator 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 practice is known as 'cherry-picking', in which Leech would place trades with brokers and routinely wait until later in the trading day to allocate the trades among clients in the portfolios he managed.

At the time, the SEC charged Leech with violating antifraud and other provisions of federal securities laws.

In response to the order handed down ast week, Western AM did not admit to the SEC's findings, but agreed to a cease-and-desist order, a censure, and to pay a civil penalty of US$100 million.

"The SEC's order finds that Western Asset wilfully violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder and failed reasonably to supervise its former co-CIO within the meaning of Section 203(e)(6) of the Advisers Act," the SEC said.

The civil penalty will be deposited into a Fair Fund and Western AM will distribute the funds to harmed investors.

A specialist in fixed income strategies, Western AM has about US$229 billion in global assets under management.

In Australia, Western AM oversees about US$11.4 billion in assets.