The Securities and Exchange Commission (SEC) recently brought forth fraud charges against Stephen Kenneth Leech, the former co-chief investment officer of Western Asset Management Company LLC (WAMCO), owned by Franklin Resources, Inc. The SEC alleges that Leech was involved in a long-running scheme from January 2021 through October 2023, where he selectively allocated trades to portfolios in a practice known as "cherry-picking," giving favorable trades to some portfolios while disadvantaging others.
According to the complaint, Leech's modus operandi included placing trades with brokers and then waiting until later in the trading day to distribute those trades across the portfolios under his management. This delay supposedly allowed Leech to capitalize on observing price movements and disproportionately assign profitable trades to his preferred portfolios, thereby benefiting himself personally and professionally. The alleged scheme resulted in Leech funneling hundreds of millions of dollars in gains to favored portfolios, all while directing losses of a similar amount to portfolios he deemed less favorable.
The SEC expressed strong condemnation of Leech's actions, with Andrew Dean, Co-Chief of the Division of Enforcement's Asset Management Unit, labeling the behavior as an "egregious abuse of power." The SEC also highlighted Leech's considerable financial gains from the scheme, including annual bonuses ranging from $28 million to $30 million per year between 2018 and 2020, and $21 million in 2022, as reported by Bloomberg. Simultaneously, the U.S. Attorney's Office for the Southern District of New York announced separate charges against Leech, indicating a coordinated effort to address the alleged wrongdoing.
In a broader context, the SEC's enforcement actions for fiscal 2024 have been noteworthy, with a total of 583 enforcement actions filed during the year. The SEC's efforts resulted in orders for $8.2 billion in financial remedies, marking the highest amount in SEC history. These financial remedies included $6.1 billion in disgorgement and prejudgment interest, a record high, and $2.1 billion in civil penalties, the second-highest amount on record. Notably, a significant portion of this financial outcome stemmed from a monetary judgment acquired following the SEC's trial victory against Terraform Labs and Do Kwon. SEC Chair Gary Gensler emphasized the Division of Enforcement's commitment to upholding market integrity and holding wrongdoers accountable through thorough investigations and legal actions.