CIO Stole Millions by Picking Winning Trades, Dodging Losers!

SEC v. Stephen Kenneth Leech — U.S. Securities and Exchange Commission Litigation Release No. 26183, dated December 3, 2024.

The SEC charged Stephen Kenneth Leech, former co-chief investment officer at Western Asset Management, with a multi-year "cherry-picking" scheme. Leech allegedly allocated favorable trades to certain portfolios and unfavorable trades to others, manipulating performance to benefit favored clients and himself, while concealing his actions from investors.

In Plain English

Imagine you have a basket of apples, some are perfect and some have bruises. You get to decide which apples go into which friend's basket. This person decided to always give the perfect apples to their favorite friends and the bruised apples to everyone else, and they hid the fact that they were doing this. They did this with investments, giving the best-performing ones to certain clients and the worst-performing ones to others, to make themselves look good and potentially make more money.

Disclaimer: all facts are drawn from the SEC's own filings; the claims described are allegations unless and until a court rules or the parties settle, and some cases end in dismissal.

How the Alleged Scheme Worked

1. Managing Trades Stephen Kenneth Leech, a co-chief investment officer at Western Asset Management (WAMCO), managed various investment portfolios. He placed trades in omnibus brokerage accounts, which combined trades for multiple clients.
2. Delayed Allocation Instead of allocating trades to specific portfolios immediately after execution, Leech typically waited hours, often until near the end of the trading day. This delay was contrary to WAMCO's training.
3. Observing Market Movements During the delay between placing and allocating trades, Leech could observe whether the market value of those trades increased or decreased.
4. Cherry-Picking Gains Leech then allocated trades that had experienced first-day gains to certain "Favored Portfolios." These gains increased the likelihood of positive performance for these portfolios.
5. Shifting Losses Conversely, Leech allocated trades that had first-day losses to "Disfavored Portfolios." This practice occurred from at least January 2021 through October 2023.
6. Massive Financial Impact Over this period, Leech allocated hundreds of millions of dollars in net first-day gains to Favored Portfolios and a similar amount in net first-day losses to Disfavored Portfolios.
7. Concealing the Scheme Leech concealed his practice of using first-day performance to allocate trades from WAMCO's clients, who were unaware of this manipulation.
8. Personal Financial Gain In March 2023, as his scheme accelerated, Leech shifted millions of dollars of his own personal investments through his deferred compensation plan into the Favored Portfolios.
9. Breach of Duty By engaging in this cherry-picking scheme, Leech effectively stole assets from Disfavored Portfolios, breaching his fiduciary duties to clients and violating federal securities laws.

The Enforcement Action

The SEC charged Stephen Kenneth Leech, former co-chief investment officer of Western Asset Management Company LLC, with a multi-year scheme to allocate favorable trades to certain portfolios and unfavorable trades to others, a practice known as cherry-picking. The SEC's complaint alleges that from at least January 2021 through October 2023, Leech placed trades and then routinely waited until later in the trading day to allocate them among clients, allowing him to observe price movements and disproportionately allocate trades with first-day gains to favored portfolios and losses to disfavored portfolios. The complaint seeks permanent and conduct-based injunctions, an officer-and-director bar, disgorgement, prejudgment interest, and civil penalties. In a parallel action, the U.S. Attorney’s Office for the Southern District of New York announced charges against Leech.

Named in this action: Stephen Kenneth Leech.

Original SEC litigation release ↗ · Browse all cases