Wamco’s Leech pleads not guilty in $600 million fraud case

(Bloomberg) — Ken Leach, the star bond trader accused of arranging winning deals for some clients, pleaded not guilty to fraud at a hearing Monday.

Leach, 70, a former co-chief investment officer at Western Asset Management Co., faces federal charges that he funneled more than $600 million in profits to privileged clients and caused losses to others. Standing with his lawyers at a hearing in federal court in New York, Leach said he would plead not guilty to all US charges.

The criminal charges, filed in parallel with the Securities and Exchange Commission lawsuit, come after a difficult year for Wamco, which bled investors after it emerged that U.S. authorities were investigating Leech’s trading. Pension funds and other large clients have pulled out huge sums, currently about $65 billion, with subsequent withdrawals.

In a preliminary hearing Monday, Judge Catherine Parker released Leach on $10 million bail. In addition to bail, Leach surrendered his passport and will limit his travel to the continental United States.

Investigators say Leach routinely waited to assign winning deals to accounts that generated the most revenue over a three-year period ending in October 2023.

According to the criminal complaint and SEC filing, Leach’s problems began several years ago when his career took a nosedive due to fluctuating interest rates and bad bets.

Over a few years, the assets under management of the Wamco Macro Opportunities fund fell by 80% and amounted to less than 3 billion dollars. According to prosecutors, Leach, who touted it as a reflection of Wamco’s best ideas, became a black eye.

When he was about to stop the withdrawals, he allegedly resorted to cherry picking. The government alleges that Leach made his daily bets and then left them for hours before distributing them among clients’ portfolios. Macro Opps Clients Get Most Profitable Deals, US Says.

This practice allegedly came at the expense of two other strategies, Core and Core Plus, which earned Wamco less income due to different commission structures across the funds.

“Flawless Record”

“Ken Leach has an impeccable record as a trader and portfolio manager for nearly 50 years,” his attorney, Jonathan Sack, said after the charges were filed last month. Leach did not benefit financially from the alleged misconduct, Sack said.

Wamco, which is owned by Franklin Resources Inc., said it was cooperating with investigators. The company was not charged with wrongdoing.

The case threatens the stellar career of Leach, who joined Wamco in 1990 and became CIO eight years later. Over the next two decades, he helped build the firm into a fixed-income giant thanks to his reputation for making bold and often successful decisions on interest rate and credit risk.

In October 2023, Wamco began reviewing about 17,000 deals conducted by Leech between 2021 and 2023 after a company insider noticed deviations in the allocation, Bloomberg previously reported.

Investors pulled tens of billions of dollars from Wamco funds after the firm disclosed investigations by the Department of Justice and the SEC. Leach took a leave of absence in August after the SEC warned he faced enforcement action.

Leach is charged with investment adviser fraud and securities fraud, each of which carries a maximum sentence of 20 years in prison; commodity trading adviser fraud and commodity fraud, both of which carry a maximum sentence of 10 years; and perjury, which carries a maximum sentence of five years.

The case: United States v. Leach, 24-cr-00658, U.S. District Court, Southern District of New York (Manhattan).

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