Ken Leech has been managing bonds—and managing them quite well—for well-nigh half a century. So it’s safe to say that after that much time and that much success, he might be a bit set in his ways. And it’s also safe to say that, after that much time and that much success, he—like other highly successful septuagenarian bond gurus—might be given a bit of leeway by his bosses. Best not mess with what’s working, etc.
Leech’s process went something like this. Like certain other highly successful septuagenarian bond gurus, he lives in California. So he gets up bright and early—5 a.m. West Coast time—and places a few dozen trades in the early hours of the trading day back east.
Now, the rules at Western Asset Management, where he served a co-CIO, require fund managers to allocate those trades right away. Unless that fund manager was Ken Leech. In that case, the procedure involved Leech’s brokers sending trade confirmations to WAMCO, the trading assistant in receipt of them frantically calling Leech to find out which of his three funds the trades were going to, Leech being on a long lunch or having a swim or whatever and not responding until just around market closing time, when he would then discuss with the harried assistant which trades went where.
By then, of course, Leech would have a pretty good idea of how the bonds he bought and sold had performed that day. And wouldn’t you know it, but the most successful of a day’s trades had a strong tendency to wind up in his flagship Macro Opportunities fund rather than in the other two. You know, the Macro Opps in which he’d boosted his owned deferred compensation stake while cutting it in the other two, the same Macro Opps fund whose fee structure generated so much more revenue for WAMCO than the other two, with half of the profit produced by that revenue going straight into Leech’s pocket.
How strong a tendency?
Statistically, the probability that these differences in first-day returns occurred by random chance is less than one in 1 trillion….
Well, that’s simply too much of a coincidence—actually about 17,000 coincidences—for WAMCO, the Securities and Exchange Commission and the Justice Department to ignore. Especially since those “coincidences” seem to have started just when Macro Opps hit a rough patch, with bad bets on interest rates, Russian debt and Credit Suisse combining with outflows to drive the fund’s assets down by 80%—and Leech’s bonus by a quarter or more with it. And wouldn’t you know it, but once the Feds started looking at those coincidences, coincidentally trades with $600 million in first-day gains would up in Macro Opps, and trades with $600 million in first-day losses wound up in the other two.
Quite a series of coincidences!
Now, Leech’s lawyer says all of the stuff in the SEC lawsuit and fraud indictment is nonsense. That being said—and given the odds involved—he doesn’t actually deny that Leech sent the good trades one way and the bad ones the other way, hours after they were made, in contravention of company policy and best practices everywhere. It’s just that doing so didn’t matter.
“These unfounded allegations ignore key facts, including the fundamental differences between distinct fixed-income strategies and the irrelevance of first-day performance to managing these strategies. Mr. Leech received no benefit from the alleged misconduct,” the statement said.
Still, less than one in a trillion! If it didn’t matter, why was he (allegedly) doing it?
Leech Shunted $600 Million to Favored Portfolios, US Claims [Bloomberg via Yahoo!]
Federal Prosecutors Charge Star Bond Investor Ken Leech With Fraud [WSJ]
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