Key Takeaways
- • Western Asset Management Company agreed to pay US$100 million to settle SEC allegations that it failed to supervise former co-CIO Stephen Kenneth Leech II in a cherry-picking scheme spanning January 2021 to October 2023.
- • The underlying misconduct involved unfair allocation of trades with realized and unrealized gains to favored portfolios while directing losing trades to other portfolios, with the criminal case alleging US$600 million in gains directed to preferred clients and US$600 million in losses allocated to others.
- • Stephen Leech II faces parallel criminal charges from the U.S. Attorney's Office for the Southern District of New York (SDNY) for securities fraud, investment advisor fraud, commodities fraud, and commodity trading advisor fraud; he has pleaded not guilty and remains presumed innocent.
- • The SEC's settlement order found that Western Asset was aware Leech's trading and allocation practices diverged significantly from other portfolio managers but failed to ensure compliance with fiduciary duties and investor disclosures.
- • After legal fees, disbursements, and applicable taxes, the settlement leaves only slightly over US$1 million available for distribution to affected investors.
Summary
Western Asset Management Company, LLC has agreed to pay US$100 million to resolve Securities and Exchange Commission (SEC) allegations of inadequate supervision in connection with a cherry-picking scheme executed by the firm's former co-chief investment officer. The settlement, announced June 5, 2026, addresses claims that the firm failed to properly oversee Stephen Kenneth Leech II, who allegedly engaged in systematic trade allocation misconduct between January 2021 and October 2023.
According to the SEC's order, Leech executed a scheme in which he unfairly allocated trades with realized and unrealized gains to specific portfolios while directing losing trades to other portfolios. The misconduct involved substantially larger trading volumes from Leech compared to other portfolio managers at the firm. The SEC alleged that Western Asset was aware Leech's trading and allocation practices diverged from those of other portfolio managers but failed to ensure those practices were consistent with the firm's fiduciary duties and its disclosures to investors. Notably, Leech did not create instructions to allocate trades to specific portfolios at or near the time of execution, a departure from standard practice that the firm did not adequately address.
In a parallel criminal proceeding, the U.S. Attorney's Office for the Southern District of New York charged Leech with securities fraud, investment advisor fraud, commodities fraud, commodity trading advisor fraud, and making false statements. The criminal allegations specify that approximately US$600 million in gains were directed to favored clients while US$600 million in losses were allocated to other clients. Leech has pleaded not guilty to all criminal charges and remains presumed innocent pending trial.
The financial impact of the settlement on harmed investors is limited. After accounting for legal fees, disbursements, and applicable taxes or HST, the US$100 million settlement leaves only slightly over US$1 million available for actual distribution to affected clients, significantly constraining the remedial benefit to those who suffered losses from the alleged misconduct.
According to the SEC's order, Leech executed a scheme in which he unfairly allocated trades with realized and unrealized gains to specific portfolios while directing losing trades to other portfolios. The misconduct involved substantially larger trading volumes from Leech compared to other portfolio managers at the firm. The SEC alleged that Western Asset was aware Leech's trading and allocation practices diverged from those of other portfolio managers but failed to ensure those practices were consistent with the firm's fiduciary duties and its disclosures to investors. Notably, Leech did not create instructions to allocate trades to specific portfolios at or near the time of execution, a departure from standard practice that the firm did not adequately address.
In a parallel criminal proceeding, the U.S. Attorney's Office for the Southern District of New York charged Leech with securities fraud, investment advisor fraud, commodities fraud, commodity trading advisor fraud, and making false statements. The criminal allegations specify that approximately US$600 million in gains were directed to favored clients while US$600 million in losses were allocated to other clients. Leech has pleaded not guilty to all criminal charges and remains presumed innocent pending trial.
The financial impact of the settlement on harmed investors is limited. After accounting for legal fees, disbursements, and applicable taxes or HST, the US$100 million settlement leaves only slightly over US$1 million available for actual distribution to affected clients, significantly constraining the remedial benefit to those who suffered losses from the alleged misconduct.
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