Franklin Templeton shares sink after major bond investor takes leave amid probe

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Shares of Franklin Templeton tumbled on Wednesday after it placed a top bond investor on leave and disclosed that regulators had warned he could face civil charges in federal investigations into suspicious trading.

Shares in the $1.6 billion manager fell 12.5 percent on Wednesday after it announced that Ken Leech, who was co-chief investment officer at its Western Asset Management subsidiary, had been placed on leave.

Franklin disclosed last month that the Securities and Exchange Commission and the Justice Department were investigating Western Asset’s derivatives trading for wealthy clients. It added on Wednesday that Leech had received a so-called Wells notice from the SEC, a formal document that is often, but not always, followed by enforcement action.

The drop in stock price and the sudden loss of the 34-year-old veteran is a blow to California’s Franklin Templeton. The family-run firm has recently tried to reinvent itself through a series of acquisitions, including its 2020 purchase of Legg Mason, which also included Western Asset.

An analyst who covers asset management said the drop in share price reflected concerns that the probe could widen and cause investors to pull assets from its funds.

“The theme is that there will be exits as a result of this,” the analyst said. “Institutional investors don’t take this lightly, so this can happen in flows and you will see this in the flow dynamics next month.”

Western Asset was conducting “an internal investigation into certain past trading assignments involving treasury derivatives in certain Western Asset managed accounts” and “is cooperating with parallel government investigations,” according to SEC filings.

The SEC and federal prosecutors declined to comment. A spokesman for Western Asset said the firm itself had not received a Wells notice and could not provide a timetable for the internal investigation.

Leech, who has more than 45 years of experience in the investment industry, has relinquished his duties to co-CIO Michael Buchanan, according to a company statement.

“We are confident that Mike’s leadership, extensive experience and deep commitment to Western Asset will ensure not only a seamless transition, but also that our clients and our team are in good hands,” said Jim Hirschmann, Chief Executive Officer and President of Western Assets.

Western also announced that, in light of Leech’s absence, the group planned to close $2 billion in bond products that Leech had co-managed.

The Western Asset Macro Opportunities fund he manages is down about 1.8 percent year-to-date and 3.1 percent over the past three years, trailing virtually all of its peers, according to Morningstar data. Since August 2021, it has seen net outflows of more than $1 billion, and Western Asset as a whole has had outflows of more than $29 billion during this period.