The Securities and Exchange Commission (SEC) filed fraud charges against a former executive at an asset management firm.
The SEC charged Stephen Kenneth Leech, the former co-chief investment officer (CIO) at Western Asset Management Company (WAMCO), for his part in a multi-year scheme to allocate favorable trades to certain portfolios and unfavorable trades to other portfolios. This is a practice commonly known as cherry picking.
The SEC said that from at least January 2021 through October 2023, Leech placed trades with brokers and then routinely waited until later in the trading day to allocate the trades among clients in the portfolios he managed.
The SEC explained that Leech’s delay between placing and allocating trades gave him the opportunity to observe price movements. He would then disproportionally allocate trades at a first-day gain to favored portfolios and trades at a first-day loss to disfavored portfolios.
The SEC alleges that Leech allocated hundreds of millions of dollars of net first-day gains to favored portfolios, adding that these trades also benefited Leech personally. He also moved a similar amount of net first-day losses to disfavored portfolios.
“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’s Division of Enforcement, said. “Investment advisers are at all times obliged to perform their functions, including trade allocations, in a manner that puts their clients’ interests first. As alleged, Leech abdicated that all-important duty for years.”
The SEC’s complaint, filed in the United States District Court for the Southern District of New York, charges Leech with violating antifraud and other provisions of the federal securities laws. The SEC is seeking permanent and conduct-based injunctions, an officer-and-director bar, disgorgement, prejudgment interest, civil penalties, and other relief.
“This alleged behavior is an egregious abuse of power,” Andrew Dean, co-chief of the Division of Enforcement’s Asset Management Unit, said. “By hand-picking trades and sending them to portfolios he favored, Leech allegedly stood to profit personally and professionally.”
In a parallel action, the U.S. Attorney’s Office for the Southern District of New York also announced charges against Leech.
For this investigation, the SEC got cooperation from the U.S. Attorney’s Office for the Southern District of New York and the FBI.