Western Asset Management, the fixed-income arm of San Mateo-based Franklin Resources, said Friday it will pay $100 million to the Securities and Exchange Commission to settle allegations that a former portfolio manager ran a cherry-picking trade allocation scheme. The deal, disclosed in company regulatory filings, is intended to wrap up parallel investigations by the SEC and the U.S. Department of Justice and to sidestep what could have been a long, messy court fight for the firm.
According to Reuters, the civil penalty will be paid by Western Asset's WAMCO unit and is expected to end the related regulatory probes. Reuters reports that the company framed the decision to settle as a business call aimed at avoiding drawn-out litigation.
What regulators alleged
Federal authorities say former WAMCO co-chief investment officer Ken Leech placed trades, then delayed final allocations so he could steer first-day winners into favored portfolios while shunting losing positions into others, a pattern regulators label "cherry-picking." The SEC's enforcement release describes hundreds of millions of dollars in net first-day gains and losses being shifted between favored and disfavored portfolios, and the U.S. Attorney's Office in Manhattan has unsealed criminal charges accusing Leech of investment-adviser and securities fraud. For the agencies' own accounts of the alleged conduct, see the SEC and the U.S. Attorney's Office.
Money back to investors
Coverage of the settlement says the penalty will be used to compensate investors believed to have been harmed in WAMCO's Core and Core Plus strategies, although the exact mechanism and timing will depend on the SEC's remediation plan and any required court steps. Investing.com notes that distribution programs in adviser enforcement cases typically take months to design and carry out.
Market reaction and the wider context
Legal coverage earlier in the week flagged a roughly $100 million figure as one of the larger adviser-related penalties to surface this year, and word that WAMCO was closing in on a deal helped shape headlines as investors tried to price in a resolution. Bloomberg Law reported that settlement talks were already advanced before Friday's filing disclosures.
Legal implications
The civil settlement resolves the SEC's claims against the advisory unit but leaves intact the separate criminal indictment against the former manager in Manhattan, where prosecutors have brought multiple counts tied to the alleged scheme. The SEC's complaint seeks injunctions, disgorgement and civil penalties, while the DOJ indictment carries potential criminal penalties if there are convictions, and the details are laid out in the agencies' public releases. See the SEC and the U.S. Attorney's Office for the specific allegations and the next steps in the legal process.
What to watch next
Investors and industry watchers will be looking to Franklin's upcoming SEC filings for any accounting charge or reserve tied to the settlement, and to the SDNY court dockets for developments in the criminal case against the former manager. The SEC's remediation plan, any court approvals for distributions, and potential follow-on civil suits or regulatory actions will determine whether this settlement really closes the book on the controversy.
