Western Asset Management, part of Franklin Resources, has agreed to a $100 million civil penalty to settle charges the Securities and Exchange Commission brought over improper trade allocation practices carried out by a former co-chief investment officer.
According to the SEC’s allegations, Stephen Kenneth Leech II engaged in conduct from January 2021 through October 2023 that resulted in certain portfolios being given priority over others. The commission said Leech allocated trades that produced first-day gains to portfolios he favored while routing trades with first-day losses to portfolios that were disfavored, all within the firm’s Core and Core Plus strategies.
The SEC further charged that Western Asset Management was aware that Leech postponed finalizing trade allocations until after market settlement prices had been determined. The agency described those delayed allocations as a central element of the scheme.
Under the settlement, Western Asset Management will pay the $100 million civil penalty. The firm is required to distribute that penalty amount to investors who sustained harm in the identified Core and Core Plus portfolios.
The matter centers on the allocation timing of trades and the way first-day profits and losses were assigned across portfolios. The settlement resolves the SEC’s enforcement action by imposing the financial penalty and directing the returned funds to harmed investors in the specified strategies.
Summary of the charges and resolution
- The SEC alleged a cherry-picking scheme by a former co-CIO that favored certain portfolios.
- The activity is said to have occurred between January 2021 and October 2023 within Core and Core Plus strategies.
- Western Asset agreed to pay $100 million, which will be redistributed to investors harmed in those portfolios.
The available information in the SEC charges highlights the mechanics alleged by regulators - allocation of first-day winners to favored accounts and delaying allocations until after settlement prices were known - and the firm’s obligation to return funds to harmed investors as part of the resolution.