Western Asset Management Company (WAMCO), a fixed-income investment firm owned by Franklin Resources, has agreed to pay a $100 million civil penalty to settle charges brought by the U.S. Securities and Exchange Commission (SEC).
The settlement is connected to allegations that former co-chief investment officer Kenneth Leech improperly allocated trades between client portfolios, a practice commonly referred to as “cherry-picking.” The SEC claims the activity occurred between 2021 and 2023 and resulted in significant advantages for selected investment strategies while harming others.
SEC Alleges Unfair Trade Allocation Practices
According to regulators, profitable U.S. Treasury derivative trades were allegedly directed toward favored portfolios after their performance became apparent, while less successful trades were assigned to other client accounts. The SEC stated that these allocations were not conducted in a fair and equitable manner.
Authorities further alleged that WAMCO failed to adequately supervise trading activities and did not take sufficient action despite being aware that certain allocation practices differed from those used by other portfolio managers within the firm.
Former Executive Still Facing Criminal Proceedings
Kenneth Leech, once one of the firm’s most prominent investment managers, was previously charged with fraud and related offenses tied to the alleged scheme. Prosecutors claim the conduct generated approximately $600 million in benefits for preferred portfolios while disadvantaging other investors.
Leech has denied the allegations and pleaded not guilty. His criminal trial is scheduled to begin later this month in New York.
Settlement Ends Regulatory Investigations Into Firm
Franklin Resources stated that WAMCO agreed to the settlement as a business decision intended to avoid prolonged legal proceedings. The company did not admit wrongdoing as part of the agreement.
The resolution concludes investigations conducted by both the SEC and the U.S. Department of Justice into the asset management firm. Regulators indicated that the penalty funds will be directed toward compensating investors affected by the alleged misconduct.
The case represents one of the largest SEC enforcement settlements involving an investment adviser in recent years and comes after significant investor withdrawals from WAMCO following the public disclosure of the investigation.
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