(Bloomberg) -- Outwardly, all is upbeat at Western Asset Management, which has invited its staff and clients to celebrate the New Year by watching the Rose Parade from Wamco’s balconies in Pasadena, California, and cheer on the firm’s flower-bedecked entry, “Float Like a Butterfly.” The parade’s theme is “Best Day Ever!”
The same can’t be said today for Wamco’s star bond trader, Ken Leech. He appeared in a Manhattan federal court Monday on criminal fraud charges that have convulsed the investment firm and rippled through its owner, Franklin Resources Inc. Pension funds and other big clients have yanked vast sums since an investigation into his trading was disclosed in August — about $65 billion so far, with more withdrawals in the works.
Inside Wamco, the staff is trying without much guidance from above to keep the firm operating while fretting about whether they should be exiting, too, according to more than a dozen people with knowledge of the situation. Jim Hirschmann, Wamco’s leader for more than two decades, has been rarely seen at the Pasadena headquarters, and Jenny Johnson, Franklin’s chief executive officer, has commented only briefly in public since Leech was charged.
“It’s a difficult situation,” Johnson acknowledged last week at a Bloomberg conference in London. “There is never much upside to talking about a government investigation publicly.”
Wamco abruptly replaced Hirschmann, 64, as CEO this month and moved him into the newly created post of chairman. The change came after US authorities accused Leech, Wamco’s former co-chief investment officer, of routinely waiting until late in the day to assign profitable trades to accounts that generated the most revenue, saddling other customers with losers.
Franklin Impact
The indictment late last month is a huge setback for Franklin, which had counted on the 2020 purchase of Wamco’s parent, Legg Mason, to broaden its business and stem persistent outflows of assets. Active managers like Franklin have been steadily losing ground to low-cost purveyors of index funds. Bloomberg Intelligence said at the time of the deal that it might be “key to Franklin’s survival.”
Instead, the acquisition — which permitted Wamco to continue operating independently from Franklin — has turned into a financial and reputational fiasco. Franklin has already taken a roughly $390 million writedown on Wamco’s mutual fund business, and the stock is down more than 25% this year. The firm is facing an exodus of money, along with the specter of its marquee manager appearing in criminal court. Leech, who pleaded not guilty on Monday, had to post bail of $10 million and surrender his passport.
Hirschmann hasn’t been accused of wrongdoing in the federal cases. “Western Asset is a global company with offices across multiple continents,” said a Wamco representative. “As any CEO would, Jim spent a portion of his time traveling to other Western offices and meeting with clients across the globe.”
Leech is on leave from Wamco and plans to fight the charges, which his lawyer says are unfounded.
One Person
Johnson portrayed the affair as isolated — “it was one person,” she told the conference attendees — and said Franklin is cooperating with investigators. She’s counting on Wamco’s remaining staff to turn things around.
“The most important thing is that we still have a lot of clients invested in Western Asset,” Johnson said. “So we have made sure that we insulated the investment team from a lot of what’s going on with the investigation, so that we can ensure that they’re managing clients’ money and staying focused on that.”
For some, it’s already too late. Defectors from the client list include the Marin County Employees’ Retirement Association, a customer for more than two decades with about $340 million. Almost $1 billion left with the Illinois Municipal Retirement Fund.
Hundreds of millions more was pulled by the Ohio Bureau of Workers’ Compensation, the Chicago Teachers’ Pension Fund, the Dallas Employees’ Retirement Fund and the Anne Arundel County retirement system. Some who remain, including the Fresno County Employees’ Retirement Association in California, are interviewing replacements.
Selling Pressure
Employee ranks are fraying, too. At least two department leaders have left, and rival asset managers are being inundated by resumes from Wamco staffers, according to some of the people familiar with the situation.
The mood at Wamco is tense and the lack of direction so marked that a full takeover of operations by Franklin would be a welcome outcome, said some of the people, who asked for anonymity to protect their jobs and relationships. Staffers are showing up to work early in the morning knowing they’re probably just going to have hit the “sell” button to raise the cash needed to pay off clients who are leaving, some of the people said.
The discontent is no small matter for an asset manager like Franklin. “People can walk out the door,” Johnson said at the Bloomberg conference. “It’s not like a lot of other types of businesses.”
On the day of Leech’s indictment, Hirschmann and two senior executives wrote to clients saying Wamco had upgraded compliance systems and was “taking steps to invest in key personnel in our investment team and broader support functions, with an eye toward retention, to ensure continuity of the high-quality service you have come to expect.”
Some executives who learned of their bonuses in recent weeks also were informed about a retention package, the people said. Others wonder if they will be offered similar encouragement or if it’s worth it to stay, given the concern about getting tainted by Wamco’s woes.
Leech’s Expertise
Interviews with people who’ve worked with Leech portray him as an exalted figure internally and externally, in part for his mastery of markets and love of history. He shunned the spotlight, resisting interviews and television spots. Instead, he led the firm’s investing group, coming up with views on economies and bonds around the world from the US to Mexico to Russia, on inflation and on the health of financial firms.
What he liked to do was trade — and often. Starting early enough to catch the market open in New York, Leech himself would place dozens of trades a day, sometimes in his own office away from the trading floor or at home, the people said. Insiders would sometimes wonder what Leech was up to, only later finding him on the trading floor or calling an assistant around the end of the day with instructions about which accounts got his trades. Other traders used the company’s technology systems instead to accomplish that task.
What Leech didn’t do, according to court filings, was follow the company’s own compliance training — and US law — that call for promptly allocating trades. For 34 months, authorities claim, Leech “cherry-picked” the winning trades based on first-day gains and losses, giving more than $600 million of them to the most profitable accounts for the firm and the ones benefiting his own wallet. The disfavored clients allegedly got over $600 million of losing wagers.
His attorney, Jonathan Sack, says the allegations “ignore key facts, including the fundamental differences between distinct fixed-income strategies and the irrelevance of first-day performance to managing these strategies.” What’s more, he says, Leech didn’t benefit from the alleged misconduct.
Hirschmann’s Leadership
While Leech was the trading brain, Hirschmann, who started a year before Leech in 1989, was the client and sales guy who helped propel the firm to prominence, especially in the 1990s and early 2000s.
Hirschmann hasn’t been a big presence at the firm for a while. He’d regularly be on the road with clients or traveling on his private plane, according to some of the people interviewed. When he was at the Pasadena headquarters, he’d arrive in his own special van and ascend to his fifth-floor office on a private elevator few others used.
Hirschmann rarely stepped foot on the trading floor, the people said, but he focused on physical aspects of the office, personally choosing carpet colors for Wamco meeting rooms and snacks sold in the cafeteria. One employee in London remembers how all the window blinds had to be pulled to the same level when Hirschmann visited.
The fall has been dramatic for Wamco, a bond manager so prestigious that it once rivaled the likes of Pacific Investment Management Co. and BlackRock Inc. Founded in 1971, Wamco was one of the original West Coast fixed-income firms that rode a bond bull market for decades. Money flowed in from investors across the US and abroad and bonuses were lavish. Leech himself recently got almost $30 million a year.
By the time Johnson bought Wamco parent Legg Mason in 2020, Wamco was the crown jewel and Leech the star manager. The purchase included a promise of autonomy for Wamco that expires in 2025.
Tighter Ties
Some of that independence is already being reeled in. Johnson and Hirschmann told a company town hall — via video rather than in person — that middle- and back-office functions would be integrated more fully into Franklin. New firmwide technology is on the way, and Wamco insiders are speculating about whether the new regime portends changes for the actual trading and investment desks.
In calls with larger clients, Franklin reps now outnumber Wamco managers, the people said. They’re being peppered with questions about Wamco’s future, potential job cuts and who will pay for lawsuits and whatever fines are imposed.
Given the sums involved, legal action against the company may follow. Fernando Vinzons, CIO for the Chicago Teachers’ fund, which pulled $550 million, said it’s “evaluating all available options.”
For his part, Hirschmann said in a Dec. 3 memo that the firm is looking forward to introducing clients to Tom Gahan, his replacement as CEO. The public announcement from Franklin didn’t include an interim period that typically comes with a leadership change. Hirschmann’s handoff, the company said, was “effective immediately.”
“Jim has been pivotal in building Western Asset and his commitment to the business has not changed,” a Wamco spokesperson said. As for the upcoming parade, Wamco has been in Pasadena for decades and participating in the event is part of the firm’s sense of civic duty, the spokesperson said.
The invitation says guests can arrive as early as 6:30 a.m. for a breakfast buffet to watch the marching bands, equestrians and the firm’s float roll by, and celebrate “the opportunities for renewal that each new year brings.”
The RSVPs are due today.
--With assistance from Francine Lacqua.
(Updates with court hearing and bail starting in the second and seventh paragraphs.)
©2024 Bloomberg L.P.