Franklin Resources’ Wamco Hit with $100 Million SEC Fine Due to Former Star Manager’s Trading Violations.

Western Asset Management Co, a subsidiary of Franklin Resources, has agreed to a substantial $100 million civil penalty in response to charges from the U.S. Securities and Exchange Commission (SEC) related to former co-chief investment officer Kenneth Leech’s alleged cherry-picking scheme, which encompassed $600 million in misallocated trades. This settlement is noteworthy, marking one of the largest penalties imposed by the SEC during President Trump’s second term, and reflects the serious implications for both the firm and its clientele. Leech’s trial is set to commence on June 15, with him pleading not guilty to the charges of fraud and making false statements.

The SEC’s investigation revealed that Leech engaged in a practice known as cherry-picking, where he reportedly favored particular clients by allocating successful U.S. Treasury derivative trades to select portfolios while directing less favorable trades to others. This manipulation of trade allocations was particularly focused on portfolios pursuing a “Macro Opportunities” strategy, especially after these portfolios suffered significant losses linked to geopolitical events and financial instability. Authorities indicated that Western Asset Management did not adequately supervise Leech or ensure that trade allocations adhered to fair and equitable standards among clients, raising serious questions about the firm’s operational oversight and governance protocols.

As a result of these allegations, Western Asset Management has experienced a significant decline in assets under management (AUM), dropping from $381.1 billion in June 2024 to $228.9 billion as of March 31, highlighting the detrimental impact of reputational damage on client confidence. Furthermore, a fund managed by Leech, the Western Asset Core Plus Bond, has suffered a dramatic decline in performance, lagging over 95% of its peers in recent years after previously outperforming since 2014. Meanwhile, Franklin Resources, which oversees a vast total of $1.68 trillion in assets as of the end of March, has opted for a settlement as a pragmatic decision to mitigate prolonged litigation and further reputational risk.

Source: The Economic Times

(Expert Note: This report was prepared by the Wealthova team.)