Western Asset's Leech Leaves CIO Role Amid SEC, DOJ Probes

What You Need to Know

Regulators are looking into if some clients were favored over others in the allocation of gains and losses from derivatives trades.
Western Asset, with $381 billion in assets, is one of the original California bond giants.
Franklin Resources, which has about $1.6 trillion in assets, acquired Western as part of its 2020 purchase of Legg Mason.

Ken Leech, the longtime Western Asset Management chief investment officer, left that role amid probes from the Justice Department and Securities and Exchange Commission into whether some clients were favored over others in allocating gains and losses from derivatives trades.

Leech, who manages some of the largest bond strategies in the U.S., will take an immediate leave of absence after receiving a Wells notice from the SEC, the company said in a filing Wednesday.

Federal prosecutors in New York are conducting a criminal probe into the practice known as “cherry-picking,” where winning trades are credited to favored accounts, according to people familiar with the matter.

“The company launched an internal investigation into certain past trade allocations involving treasury derivatives in select Western Asset-managed accounts,” the firm said. “The company is also cooperating with parallel government investigations.”

Western Asset said Wednesday it’s closing its $2 billion Macro Opportunities strategy and named Michael Buchanan as sole CIO. Shares of parent company Franklin Resources Inc. tumbled 13% to $19.78, the most since October 2020, extending their decline this year to 34%.

Western Asset, with $381 billion in assets, is one of the original California bond giants and once rivaled Pacific Investment Management Co. and BlackRock Inc. in size. Its key funds have struggled in recent years amid the rise in interest rates, leading to outflows in its flagship strategy, which Leech helped run.

Franklin, which has about $1.6 trillion in assets overall, acquired Western as part of the 2020 purchase of Legg Mason. Leech has worked at Western Asset for more than 30 years, serving as CIO for the bulk of that time.

A Wells notice, which isn’t a formal allegation or finding of misconduct, provides a chance to respond to the agency and try to dissuade it from filing a case.