Star fund manager takes leave amid cherry-picking allegations

Leech, who manages some of the largest U.S. bond strategies, will take a leave of absence immediately after Wells receives a notice from the SEC, the company said in a Wednesday filing. Federal prosecutors in New York are conducting a criminal investigation into the practice known as “cherry-picking,” in which winning trades are credited to favored accounts, according to people familiar with the matter.

“The firm has launched an internal investigation into certain past trading allocations involving treasury derivatives in certain managed Western Asset accounts,” the firm said. “The company is also cooperating with parallel government investigations.”

Western Asset said on Wednesday it was closing its $2 billion Macro Opportunities strategy and appointed Michael Buchanan as sole CIO. Shares of parent company Franklin Resources Inc. they fell 13% to $19.78, the most since October 2020, extending their decline this year to 34%.

Western Asset, with $381 billion in assets, is one of California’s original bond giants and once rivaled Pacific Investment Management Co. and BlackRock Inc. in size. Its key funds have struggled in recent years amid rising interest rates, leading to exits in its flagship strategy, which Leech helped lead.

Franklin, which has about $1.6 trillion in assets, acquired Western as part of its 2020 acquisition of Legg Mason. Leech has worked at Western Asset for more than 30 years, serving as CIO for most of that time.

A Wells notice, which is not a formal charge or finding of wrongdoing, gives the agency a chance to respond and try to dissuade it from filing.

Leech was a star for years. He co-managed the firm’s Core Plus fund as it outperformed its peers, though it also stumbled in 2018 when the Fed raised rates. Since 2021, it has been hit by bets on a pivot by the central bank.

The $19 billion mutual fund, which is up 2.4 percent this year, has trailed more than 90 percent of rivals over the past three and five years, and investors have been pouring in cash.

This withdrawal of the Western Asset fund is in contrast to rivals managed by companies such as Pimco, Capital Group Inc. and BlackRock Inc., which have taken in cash this year as the Federal Reserve prepares to cut interest rates.

“At Franklin, it’s somewhat problematic because the whole reason for buying Legg Mason was to help offset the loss of fee-based sales to boost flows,” Morningstar strategist Greggory Warren said in a telephone interview. “The acquisition of Legg was seen as helping to secure greater fixed income and institutional client exposure and being less exposed to fee pressures.”

Western quietly appointed Buchanan as co-investment officer alongside Leech in August 2023. John Bellows, who co-managed Core Plus since 2018, left abruptly in early May. A Western spokesman said earlier that the firm thanked Bellows for his contributions.

Jim Hirschmann, Western’s chairman and chief executive, said in the statement that Buchanan “has been instrumental in Western Asset’s strategy and growth, and we look forward to having him lead the next chapter of our investment team.”

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