U.S. Attorney Damian Williams said: “We allege today that S. Kenneth Leech II—the Chief Investment Officer of a significant manager of pension funds and other long-term investments—used his position to cherry pick trades and prop up his favored but failing accounts at the expense of others. These charges should be a reminder that this Office continues to police all corners of the financial markets and will swiftly hold those accountable who believe that they can cheat and abuse the trust of clients for their own purposes.”
FBI Assistant Director in Charge James E. Dennehy said: “Kenneth Leech, the former CIO of Western Asset Management Company, allegedly violated his fiduciary duty by crafting a preferential treatment scheme to allot more than $600 million in profits and losses to particular clients. Instead of allocating trades appropriately, Leech allegedly allowed favoritism to benefit preferred accounts for their benefit. The FBI will continue to investigate any individual who exploits their trusted position to favorably treat certain clients at the expense of others."
According to the allegations in the Indictment unsealed today in Manhattan federal court:[1]
Between 2021 and October 2023, LEECH committed fraud and abused the trust placed in him by clients of the investment-management company WAMCO. LEECH engaged in a criminal scheme commonly known as “cherry picking” to compensate for losses in his marquee investment strategy by assigning trades that performed well during their first day into client accounts associated with that investment strategy, and assigning trades that performed poorly over their first day into the accounts of other clients, who were not aware that LEECH was causing them losses to favor others. LEECH’s victims included institutional and retail investors who trusted LEECH to manage their savings and pension plans. Over the course of his criminal scheme, LEECH allocated trades with net first-day gains of at least approximately $600 million to his favored strategy and clients, and allocated trades with net first-day losses of at least approximately $600 million to clients to whom he owed an equal fiduciary duty.
LEECH was able to carry out this scheme because, as Chief Investment Officer of WAMCO, LEECH was responsible for making trades on behalf of different portfolios and assigning those trades to the portfolio for which he had traded—a process generally referred to as “allocation.” One set of portfolios for which LEECH traded followed what WAMCO called the “Macro Opportunities” strategy (“Macro Opps”). Another set of portfolios followed what WAMCO called the “Core” and “Core Plus” strategies (together, the “Core Strategies”). LEECH owed a fiduciary duty to any client who invested in portfolios that followed either of these strategies.
Despite that duty, and in violation of it, LEECH engaged in a fraudulent scheme to bolster Macro Opps, which necessarily came at the expense of the Core Strategies, by allocating trades based on their performance between the time he placed the trades and the time he made his allocations. He carried out this scheme by placing trades, waiting to see how those trades performed throughout the day, and then using the first-day performance of his trades to determine where to allocate them—assigning better-performing trades to Macro Opps and worse-performing trades to the Core Strategies. This was contrary to WAMCO’s compliance trainings, which emphasized that LEECH should allocate trades promptly, and against WAMCO’s policies, which prohibited allocating trades on the basis of first-day performance to make up for losses.
Neither LEECH nor WAMCO disclosed to investors that LEECH used first-day performance to decide how to allocate trades, or that LEECH was favoring Macro Opps in his allocations. To the contrary, WAMCO represented to investors that LEECH and others knew where they planned to allocate a trade before making the trade and finalized the allocation promptly after the trade was completed, and LEECH later testified before the U.S. Securities and Exchange Commission (“SEC”) that he knew where he planned to allocate a trade when he placed it. This testimony was false and the reality was far different. LEECH routinely waited hours after making his trades—often until late in the day—to make his allocations, allowing him to observe how his trades had performed before deciding where to allocate them. Between 2021 and October 2023, LEECH used that ability to see how the market moved to support Macro Opps by awarding it better performing trading and hiding worse performing trades in the Core Strategies.
By allocating trades based on first-day performance, LEECH bolstered the overall performance of Macro Opps at the expense of the larger Core Strategies. Each time LEECH assigned a trade with a first-day gain to Macro Opps, or assigned a trade with a first-day loss to the Core Strategies, LEECH improved or protected the daily performance of Macro Opps. When done consistently over time, those daily boosts added up to significantly enhance the performance of Macro Opps. From January 2021 through October 2023, the Treasury futures and options trades that LEECH allocated specifically to Macro Opps had net first day gains of over $600 million. By contrast, during this period, the Treasury futures and options trades that LEECH allocated specifically to the Core Strategies had net first day losses of over $600 million.
LEECH’s bias in favor of Macro Opps was more pronounced the larger the first-day gain or first-day loss. For example, between 2021 and October 2023, there were over 500 Treasury futures or options trades that LEECH chose to allocate specifically to either Macro Opps or the Core Strategies and that had first-day gains over $500,000. LEECH allocated over 90% of those winning trades to Macro Opps and fewer than 10% to the Core Strategies. Conversely, over that same time period, there were over 500 Treasury futures or options trades that LEECH chose to allocate specifically to either Macro Opps or the Core Strategies and that had first-day losses over $500,000. LEECH allocated less than 10% of those losing trades to Macro Opps, while allocating over 90% of them to the Core Strategies.
Similarly, between 2021 and October 2023, there were over 150 Treasury futures or options trades that LEECH chose to allocate specifically to either Macro Opps or the Core Strategies and that had first-day gains over $1,000,000. LEECH allocated over 90% of those winning trades to Macro Opps and less than 10% to the Core Strategies. Over that same time period, there were over 200 Treasury futures or options trades that LEECH chose to allocate specifically to either Macro Opps or the Core Strategies and that had first-day losses over $1,000,000. LEECH allocated less than 5% of those losing trades to Macro Opps, while allocating over 95% to the Core Strategies.
LEECH’s pattern of biased allocation was steady over the period relevant to this Indictment. In each of the 34 months between the beginning of 2021 and October 2023, the U.S. Treasury futures and options trades allocated specifically to Macro Opps had a net first-day gain. By contrast, over that same period, the U.S. Treasury futures and options trades that LEECH allocated specifically to the Core Strategies had net first-day losses in all months except two.
The bias in favor of Macro Opps was not caused by LEECH pursuing a unique trading strategy for Macro Opps. Notably, when LEECH did not exercise discretion to allocate trades between Macro Opps and the Core Strategies, the trades that went to Macro Opps were not characterized by disproportionate first-day gains.
For example, between 2021 and October 2023, LEECH had a standing instruction that trades he made through a certain broker (“Broker-1”) should, by default, be allocated to Macro Opps. As a result, LEECH generally did not exercise discretion to allocate trades through Broker-1 at the end of the day because his trading assistant automatically allocated them to Macro Opps. When Treasury futures and options trades were allocated to Macro Opps without LEECH first observing performance in the market, the bias in favor of Macro Opps disappeared. Over the relevant time period, approximately 55% of the trades LEECH placed through Broker-1 trades had first-day gains, while approximately 45% had first-day losses. These trades produced modest first-day losses, generating an average first-day loss of over $5,000. This is dramatically lower than the average first-day gain of approximately $225,000 that LEECH generated on those trades that he specifically allocated to Macro Opps when he had an opportunity to see market movements before making an allocation decision.
After October 2023, WAMCO removed LEECH from the Core Strategies, so he no longer had the authority to allocate trades to those strategies. As with the Broker-1 trades, when LEECH no longer had discretion to allocate trades to the Core Strategies, the trades LEECH allocated to Macro Opps stopped having a consistent, pronounced bias toward first-day gain.
In all, between 2021 and October 2023, the U.S. Treasury futures and options trades LEECH allocated specifically to Macro Opps had net first-day gains of over $600 million. By contrast, the U.S. Treasury futures and options trades LEECH allocated specifically to the Core Strategies had net first-day losses of over $600 million.
LEECH, 70, of Pasadena, California, is charged with one count of investment adviser fraud and one count of securities fraud, each of which carries a maximum sentence of 20 years in prison; one count of commodity trading adviser fraud and one count commodities fraud, each of which carries a maximum sentence of 10 years in prison; and one count of making false statements, which carries a maximum sentence of five years in prison.
The maximum potential sentences in this case are prescribed by Congress and are provided here for informational purposes only, as any sentencing of the defendant will be determined by a judge.
Mr. Williams praised the outstanding work of the FBI. Mr. Williams further thanked the SEC, which today filed a parallel civil action against LEECH.
This case is being handled by the Office’s Securities and Commodities Fraud Task Force. Assistant U.S. Attorneys Thomas S. Burnett and Peter J. Davis are in charge of the prosecution.
The charges contained in the Indictment are merely accusations, and the defendant is presumed innocent unless and until proven guilty.
[1] As the introductory phrase signifies, the entirety of the text of the Indictment and the description of the Indictment set forth in this release constitute only allegations, and every fact described should be treated as an allegation.
