Compliance November 26, 2024

SEC Charges Former WAMCO co-CIO With Fraud

The SEC alleges Ken Leech engaged in a multi-year scheme to favor some clients over others through a practice known as ‘cherry-picking,’ including in client savings and pension plans.

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Former Western Asset Management Co. LLC co-CIO Stephen Kenneth Leech has been charged in a $600 million fraud case for allegedly profiting from the allocation of favorable trades to certain clients at the cost of other clients.

The charges were levied by the Securities and Exchange Commission in U.S. District Court for the Southern District of New York on Monday. If convicted, Leech faces a maximum sentence of 20 years in prison, along with the permanent ban from the industry.

The move comes after the SEC said earlier this year it was initiating a probe of the potential scheme, known as cherry-picking, leading to Leech taking a leave of absence in August, with Michael Buchanan taking over as CIO. Buchanan had formerly been co-CIO with Leech.

Ken Leech

WAMCO, owned by Franklin Templeton, is a fixed-income manager overseeing over $381.1 billion in client assets.

The SEC’s complaint alleges that from at least January 2021 through October 2023, Leech placed trades with brokers and then waited to allocate the trades among client portfolios. According to the charges, that delay allowed him to observe price movements and allocate wins to some client portfolios, also profiting himself, and losses to other clients.

The gains to favored clients amounted to some $600 million, with that same amount going to disfavored clients, according to the claims.

“The scale and duration of Leech’s allegedly fraudulent conduct amounts to a shocking betrayal of his fiduciary obligations to his clients, who paid dearly for his transgressions,” Sanjay Wadhwa, the acting director of the SEC’s Division of Enforcement, said in a statement. “Investment advisers are at all times obliged to perform their functions, including trade allocations, in a manner that puts their clients’ interests first. As alleged, Leech abdicated that all-important duty for years.”

According to the U.S. attorney general’s office, the cherry-picking harmed institutional and retail investors who “trusted Leech to manage their savings and pension plans.”

As co-CIO, Leech was acting as a fiduciary for any investors in WAMCO’s Macro Opportunities fund and its Core and Core Plus funds, according to the attorney general. Despite that duty, he allegedly engaged in a scheme to bolster the Macro Opportunities fund at the expense of the Core funds.

“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,” the attorney general’s office wrote.

The office also alleged that neither Leech nor WAMCO disclosed to clients the nature of the trading or that there was favoritism of the Macro Opportunities strategy.

“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,” the office stated. “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.”

An attorney representing Leech has disputed the charges in a statement and said Leech will defend himself in the case.

“Ken Leech has an unblemished record over nearly 50 years as a trader and portfolio manager,” Jonathan Sack, of Morvillo Abramowitz, said in a statement. “These unfounded allegations ignore key facts, including the fundamental differences between distinct fixed-income strategies and the irrelevance of first-day performance to managing these strategies. Mr. Leech received no benefit from the alleged misconduct.”

The investigation has seen clients pulls tens of billions of dollars from WAMCO bond funds, according to data from Bloomberg LP.

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Parent company Franklin Templeton did not immediately respond to a request for comment.

The U.S. attorney’s office charged Leech with securities fraud, investment adviser fraud, commodity trading adviser fraud, commodities fraud and making false statements.


Deals & People November 26, 2024

Trump’s Labor Secretary Pick Has More Health Than Retirement History

Oregon representative Lori Chavez-DeRemer also comes with pro-labor record that may give pause to Republican Senators.

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President-elect Donald Trump chose what some in the Washington Beltway are calling an “unusual” nominee in Representative Lori Chavez-DeRemer, R-Oregon, as the next Secretary of Labor, responsible for a Department of Labor that has been active in the retirement sector in recent years.

Lori Chavez-DeRemer

At first look, Chavez-DeRemer stands out mostly for positions she has taken on health care benefits and a pro-union stance she took as a Republican in a state that leans Democratic—she narrowly lost her reelection bid earlier this month to Democrat Janelle Bynum.

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Brad Campbell, a partner in Faegre Drinker Biddle & Reath LLP, called Chavez-DeRemer an “unusual” selection for a Republican secretary of labor, as her opposition to state “right-to-work” laws is “likely to be a serious concern for many Senate Republicans.”

He also noted that while Chavez-DeRemer has not made any public statements regarding the DOL’s fiduciary rule—officially the Retirement Security Rule— as a member of the House Committee on Education and the Workforce, she was the only Republican (25 were on the committee) to vote against a Congressional Review Act resolution to strike down the Biden fiduciary rule.

“I have been warning clients and colleagues for some time that President Trump’s election would not automatically mean opposition to the fiduciary rule, and this nomination is an example of that,” Campbell said in an email. 

Chavez-DeRemer did, however, vote for the Congressional Review Act resolution against the DOL’s rule on prudence and loyalty in selecting investments, otherwise known as the ESG rule, Campbell noted. Many industry watchers believe the Trump administration will seek to once again reverse that rule to refocus investment selections on “pecuniary factors,” as he did when first in office from 2017 to 2021.

Union, Health Reform

Chavez-DeRemer was notably one of three Republicans (along with 215 Democrats) to sponsor the Protecting the Right to Organize, or PRO, Act of 2023, which sought to make it easier for workers to unionize.

Teamsters union President Sean O’Brien praised Chavez-DeRemer’s nomination in a statement on social media, saying the Teamsters are “ready to work with [her] every step of the way to expand good union jobs and rebuild our nation’s middle class.”

O’Brien spoke at this year’s Republican National Convention, but his union did not endorse a candidate in the presidential election.

Chavez-DeRemer has not been publicly outspoken about retirement policy but did co-sign three bipartisan bills that would help ensure public safety officers receive health care and retirement benefits.

She has, however, been more active on the employer health plan side of the Employee Retirement Income Security Act, including co-sponsoring legislative proposals addressing group health care cost transparency, according to Allie Itami, a partner in Lathrop GPM LLP.

“I would imagine that, if confirmed, she would continue to show an interest in the regulation of group health plans by DOL through the [Employee Benefits Security Administration],” Itami says.

During a House hearing in January before the Subcommittee on Health, Employment, Labor and Pensions, Chavez-DeRemer spoke about how small business should not have to “play games” to get the full picture of the cost of health plans they are offering their employees.

Along with Representatives Mark Takano, D-California, and Kathy Manning, D-North Carolina, Chavez De-Remer has led the bipartisan Health Data Act, which aims to make it easier for employers to choose affordable health care options.

“[The bill] would strengthen the ability of plan sponsors to access data from [third-party administrators],” Chavez De-Remer said in the hearing. “Such reforms would make it easier for employers to leverage their own data when designing innovative payment models.”

She has also spoken out about conflicting incentives of pharmacy benefit managers, arguing that many PBMs favor medicines with high list prices and larger rebates. In September, the Federal Trade Commission sued the big three PBMs—Caremark Rx, Express Scripts and Optum Rx—over their alleged “opaque business practices,” among other issues.

Hazy Outlook

Mark Iwry, a nonresident senior fellow for the Brookings Institution, says he would “be careful not to read too much into the implications” of Chavez-DeRemer as her nomination relates to retirement policy.

Iwry argues that the main factors at play concerning retirement policy are the 2025 Tax Cuts and Jobs Act; the newly formed Department of Government Efficiency aimed at slashing federal spending; and the Supreme Court’s overturning of the Chevron doctrine, which shifts power to the courts from federal agencies when it comes to interpreting and enforcing regulations.

Campbell, of Faegre Drinker Biddle & Reath, said he expects senators to press Chavez-DeRemer on key issues facing the DOL.

“My hope is that the Senate HELP (Health, Education, Labor and Pension) Committee will seek specific policy commitments from Chavez-DeRemer regarding several important issues facing the department, including the fiduciary rule, the independent contractor rule, the overtime rule and right-to-work issues, as part of the confirmation process,” he said.

Such responses may be the first time industry watchers will have a true sense of what kind of secretary of labor she will be. In a Wagner Law Group alert on Monday, attorneys Drew Oringer, Mark Greenstein, Susan Rees and Stephen Wilkes wrote that the choice of a pro-labor head of the DOL may cast “real additional doubt on what a Trump DOL will do on any number of specific matters.”

“Now even less clear is the extent to which the ERISA-related decisions, strategies and approaches of the first Trump administration will carry over to the second,” the attorneys stated. “In any event, as to general enforcement activity, as opposed to rulemaking and other interpretive activity, the DOL’s consistent attention to protecting participants and beneficiaries from carelessness and malfeasance may well be safe.”

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