DOJ questions Western Asset clients as Ken Leech probe heats up

Money managers that used Western Asset Management Co. to help invest their bond portfolios are being pressed about their dealings with the firm, as US authorities ramp up their investigation of how once-star trader Ken Leech allocated winning bets.

Fidelity Investments, Russell Investments and SEI Investments Co. are among the firms that received information requests from federal prosecutors in recent months, according to people familiar with the inquiries. As a force in the bond market for decades, Wamco has overseen money for institutional investors and fixed-income allocations for other money managers.

The US Attorney’s Office in Manhattan asked what investors were told about how Wamco allocated trades, said the people, who asked not to be identified because the probes are confidential. Authorities haven’t suggested the firms receiving the requests were involved in any wrongdoing.

US authorities are examining whether Leech parceled out winning trades to favored clients at the expense of others — a practice known as cherry-picking. Investors have pulled billions of dollars from Wamco funds since the firm disclosed criminal and civil investigations earlier this year. Leech took a leave of absence as co-chief investment officer in August after the Securities and Exchange Commission warned he could face a potential enforcement action.

Leech hasn’t been sued by the SEC or charged by prosecutors. Investigations by the Justice Department and SEC can end without any charges being brought. 

A representative for Leech didn’t respond to requests for comment. Wamco declined to comment. Representatives for the US Attorney’s Office for the Southern District of New York and the SEC declined to comment, as did spokespeople for Fidelity, SEI Investments and Russell Investments.

Founded in 1971, Wamco has been a major bond market player, managing major accounts for institutional investors as well as being picked by other investment firms to handle fixed-income allocations in their own funds. At times, Wamco rivaled the likes of BlackRock Inc. and Pacific Investment Management Co. in size, but its streak of lackluster performance over the past three years prompted an investor exodus.

Pasadena, California-based Wamco, which is owned by Franklin Resources Inc., has previously said it’s cooperating with the SEC and DOJ after launching its own investigation into about 17,000 trades made by Leech over three years. The transactions were spread across 38 accounts and three strategies, Bloomberg previously reported.

Russell Investments and SEI also previously disclosed that they’re ending relationships with Wamco, which oversaw money for several investment funds offered by the two money managers. Fidelity Investments’ Strategic Advisers Core Income Fund pared its allocations to Wamco’s Core Plus Bond Fund over several quarters, according to data compiled by Bloomberg.

Franklin Resources said on Oct. 9 that Wamco clients pulled $37 billion total in the quarter ended Sept. 30, and the data show assets in the firm’s flagship Core and Core Plus mutual funds have plunged. As of the end of the period, Wamco managed about $353 billion, which is roughly one-fifth of Franklin’s overall assets.