In the world of asset management, the recent charges against Ken Leech, the former Co-Chief Investment Officer of Western Asset Management Co., serve as a stark reminder of the critical importance of adhering to meticulous trade allocation processes. The Securities and Exchange Commission’s (SEC) announcement in November 2024 highlighted Leech’s fraudulent activities—allegedly engaging in “cherry-picking” trades to benefit favored portfolios while disadvantaging others. This serves as a call to action for compliance departments across the industry to scrutinize their policies and procedures to prevent similar situations.
Understanding the Allegations Against Ken Leech
According to the SEC, between January 2021 and October 2023, Leech engaged in a scheme where he observed price movements before disproportionately allocating beneficial trades to preferred portfolios. This practice resulted in significant personal and professional gain while violating fundamental fiduciary duties to his clients.
The scale of Leech’s alleged conduct illustrates not only a betrayal of trust but also an egregious abuse of power—highlighting the vulnerabilities inherent in asset management processes when controls are not diligently enforced.
Key Considerations to Mitigate Risk
To protect organizations and their leaders from similar accusations and the potential for fraud charges, consider integrating these best practices into your asset management protocols when conducting your review:
1. Embrace Technological Solutions
- Utilize Electronic Platforms: Ensure all trades are executed through electronic order management systems (OMS), significantly reducing the need for manual intervention and minimizing human error.
2. Implement Stringent Trade Allocation Policies
- Restrict Omnibus Accounts: Limit the use of omnibus accounts with brokers. Conduct all trading at the block level, and communicate allocations electronically soon after execution.
- Segregation of Duties: Empower only designated traders, not portfolio managers (PMs), to execute trades, maintaining a clear separation of responsibilities.
3. Strengthen Pre-Trade Compliance
- Prohibit Phone Orders: PMs should enter trade instructions either verbally through the trading desk or directly into the OMS after verifying pre-trade compliance.
- Pre-Allocate Orders: Ensure all orders undergo pre-trade compliance checks before execution, reducing the opportunity for cherry-picking.
4. Maintain Control of the Trading Blotter
- Limit Order Control: Once an order appears on the trading blotter, only allow traders to manage it. This prevents unauthorized control and manipulation of trades.
5. Standardize Pricing
- Use Average Pricing for Block Trades: Apply average pricing across participating accounts in block trades, promoting transparency and fairness.
Conclusion
The Ken Leech case underscores the essential need for strong compliance frameworks in asset management. By adopting stringent trade allocation processes and leveraging technology effectively, organizations can not only safeguard against fraudulent practices but also uphold the trust of their clients. The SEC’s actions serve as a critical reminder to prioritize compliance and ethics in every aspect of asset management operations.
For any questions on asset management or to learn more about how TillieStar can support your organization, please contact us at sales@tilliestar.com or (617) 865-3550. Explore our services and insights tailored specifically for the asset management industry.
Related Articles