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Ken Leech Funneled Gains to IBM in Alleged Cherry-Picking Fraud

(Bloomberg) -- International Business Machines Corp. was a beneficiary of Ken Leech’s alleged “cherry-picking” scheme referenced in criminal charges against the bond manager, according to people with knowledge of the matter.

When the US Department of Justice accused the veteran investor of illegally shunting gains to favored clients at Western Asset Management Co., authorities didn’t identify any of them by name. They said Leech acted to protect his flailing marquee Macro Opportunities strategy as well as boost gains for two of his longtime clients.

IBM is referred to as “Account-2” throughout the fraud indictment against Leech, the people said, asking not to be identified discussing nonpublic information. Its returns were particularly inflated because of the account’s relatively small size, boosting overall performance, according to the complaint. Various investment firms are typically tapped by large corporations to manage parts of their pension plans or other investing activities.

Representatives for IBM and Wamco declined to comment. Spokespeople for the Justice Department and Leech didn’t comment on the unnamed accounts. 

The documents don’t accuse Wamco or any of its clients of knowing about or participating in the alleged fraud.

But to Leech and Wamco, Account-2 was especially important because they used that client’s portfolio track record to showcase Leech’s prowess when they created the broader Macro Opps strategy a little over a decade ago, according to the indictment. Though the account’s balance was relatively small from 2021 through 2023, when Leech cherry-picked profitable bond bets, the “allocations had a substantial, positive impact on Account-2’s overall performance,” prosecutors wrote.

Last week, the DOJ and Securities and Exchange Commission accused Leech of breaking laws to inflate the performance of his most prominent strategy and keep key clients happy after he hit a rough patch in the markets. 

Over three years, the money manager allegedly placed bets on bonds, waited several hours, then disproportionately allocated wagers that rose to Macro Opps and certain clients. That ended up steering more than $600 million of first-day gains to those clients and a roughly equal amount of losses to portfolios tracking two other strategies, authorities said.

Leech’s lawyer previously said the government’s claims “ignore key facts, including the fundamental differences between distinct fixed-income strategies and the irrelevance of first-day performance to managing these strategies.”

Wamco has been struggling to stanch heavy outflows after it disclosed that the SEC is investigating three years of Leech’s trading. Since then, the firm has bled more than $50 billion as pension funds and other clients pulled their money, shifting capital to rivals.

Franklin Resources Inc., Wamco’s parent since 2020, will start integrating parts of the bond house with the broader firm, Chief Executive Officer Jenny Johnson told staff last month. Jim Hirschmann stepped down as Wamco CEO earlier this week.

Wamco had been struggling with client redemptions for a few years before the SEC probe, as lackluster performance sparked outflows and the departure of senior employees.

--With assistance from Brody Ford and Ava Benny-Morrison.

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