Federal prosecutors have charged Ken Leech, former chief investment officer of Western Asset Management Co. (Wamco), with orchestrating a $600 million "criminal cherry-picking scheme," according to an indictment unsealed Monday in New York federal court.

Wamco Exec Cherry Picking Trial : Fraud Allegations Against Leech

The indictment accuses Leech, 70, of multiple counts, including securities fraud, investment adviser fraud, commodity trading adviser fraud, commodities fraud, and making false statements. On the same day, the U.S. Securities and Exchange Commission (SEC) filed a civil suit alleging similar misconduct.

Between 2021 and 2023, Leech allegedly allocated over $600 million in gains to favored Wamco clients while shifting an equal amount of losses onto disfavored clients. Wamco itself is not a defendant in either case.

Damian Williams, U.S. attorney for the Southern District of New York, described the scheme as an abuse of Leech’s authority to "prop up his favored but failing accounts at the expense of others." Acting SEC Enforcement Director Sanjay Wadhwa labeled Leech’s actions a "shocking betrayal" of fiduciary obligations, emphasizing that investment advisers must prioritize client interests above all else.

Manipulating Trade Allocations

As chief investment officer, Leech was responsible for assigning trades across Wamco's portfolios. According to the indictment, he manipulated this process, using first-day trade performance to decide which accounts would receive gains or losses.

Leech assigned successful trades to portfolios aligned with Wamco’s "macro opportunities" strategy while disadvantaging "core" and "core plus" strategies, the Justice Department (DOJ) alleged. These actions harmed institutional and retail investors, including those with pension and savings plans, prosecutors said.

"Leech routinely waited hours after making his trades — often until late in the day — to make his allocations," allowing him to observe trade performance before deciding, the DOJ said.

Compliance Failures and False Testimony

Leech’s alleged actions violated Wamco's compliance policies, which required pre-determined trade allocations and swift finalization. Prosecutors said neither Leech nor Wamco disclosed this allocation method to investors.

Leech also testified to the SEC that he planned allocations in advance of trading, a claim prosecutors allege was false. The DOJ noted that after Wamco restricted Leech’s allocation authority in October 2023, the macro opportunities portfolio no longer exhibited its "consistent, pronounced bias toward first-day gains."

Wamco’s Parent Company Under Scrutiny

Wamco's parent company, Franklin Resources Inc., disclosed the federal investigations in July after conducting its own internal review of trade allocations involving Treasury derivatives. Leech went on leave in August after receiving a Wells notice from the SEC.

Franklin Resources has pledged cooperation with the investigations, stating it would act on findings following the inquiries’ conclusion.

Wamco Exec Cherry Picking Trial : Ongoing Legal Actions

In addition to criminal charges, the SEC’s civil complaint seeks permanent injunctions, disgorgement, and civil penalties against Leech for violating federal securities laws.

Leech has not yet publicly responded to the allegations. Wamco and Leech's counsel could not be reached for comment.

The DOJ case is led by Assistant U.S. Attorneys Thomas S. Burnett and Peter J. Davis, while the SEC’s legal team includes Andrew Dean, Brent Wilner, and others from its Enforcement Division.