Western Asset Management Company, LLC (Wamco), the fixed‑income asset management unit of Franklin Resources, has agreed to pay a $100 million civil penalty to the U.S. Securities and Exchange Commission to settle charges tied to alleged trading misconduct by its former co‑chief investment officer. The settlement, formalized in an SEC order issued in early June 2026, resolves claims that Western Asset failed to act reasonably to detect and prevent a multi‑year trade allocation scheme that favored certain portfolios at the expense of others and violated the Investment Advisers Act of 1940.

Under the terms of the SEC settlement, Western Asset neither admitted nor denied the regulatory findings, a common outcome in such enforcement matters, but agreed to pay the substantial civil penalty into a fair fund intended to compensate investors harmed by the conduct. The SEC’s order censures the firm and imposes a cease‑and‑desist directive alongside the monetary penalty, formalizing obligations to correct compliance and supervisory deficiencies identified in its practices. The firm agreed to the settlement as a “business decision,” according to its parent company, to avoid the distraction and uncertainty of extended litigation.

The misconduct at the heart of the SEC’s action involves what regulators described as a “cherry‑picking” scheme alleged to have been carried out by Stephen Kenneth Leech II, Western Asset’s co‑chief investment officer during the period in question. Leech has pleaded not guilty to related criminal fraud charges brought by the U.S. Attorney’s Office for the Southern District of New York, which included multiple counts alleging he fraudulently allocated trades by delaying trade attribution until after settlement prices were established. This practice, the government alleges, allowed him to steer trades with first‑day gains to favored portfolios — particularly those in strategies where performance was lagging — while assigning trades with initial losses to other accounts.

According to the SEC’s order, the alleged scheme occurred between January 2021 and October 2023. Regulators found that Leech routinely delayed entering allocation instructions until after critical market pricing points, enabling him to observe intraday price movements that created an informational advantage in determining which portfolios received profitable versus unprofitable trades. The conduct, as charged, violated Sections 206(2) and 206(4) of the Investment Advisers Act, which prohibit fraudulent practices and require adequate compliance policies and supervision at registered investment advisers. While Western Asset’s compliance manuals and internal controls warned about the risks of delayed allocations and highlighted prior enforcement actions involving similar conduct, the firm failed to take reasonable steps to investigate or prevent the alleged behavior, according to the SEC’s administrative order.

The origins of scrutiny over the trade allocation practices at Western Asset trace back to regulatory disclosures in 2024 and earlier civil and criminal charges against Leech. The SEC first publicly disclosed its investigation in August 2024, upon which Leech stepped down from his role as co‑CIO, and shortly thereafter, client outflows from the firm accelerated sharply. As investors grew concerned about governance and the potential impact of the allegations, Western Asset experienced significant asset contraction. Earlier reports showed outflows reaching as high as tens of billions of dollars from its flagship Core and Core Plus portfolios alone, contributing to a marked reduction in assets under management.

By March 2026, Western Asset’s assets under management had declined from approximately $381 billion in mid‑2024 to roughly $229 billion, reflecting both market conditions and investor redemptions tied to the regulatory issues. Franklin Resources, which owns Western Asset, reported total assets under management of about $1.68 trillion as of the same period, with the fixed‑income unit’s shrinkage materially affecting its profile. The erosion in client assets underscores investor sensitivity to compliance lapses and the financial consequences of sustained regulatory scrutiny in the asset management space.

Despite the settlement, the criminal case against Leech remains active, with proceedings in the U.S. District Court for the Southern District of New York continuing independently of the SEC’s civil resolution. His trial is scheduled to begin in mid‑June 2026, where the government must prove its case on the criminal counts, and Leech will have the opportunity to defend against the allegations. The parallel civil and criminal enforcement actions illustrate the U.S. government’s layered approach to addressing misconduct that has both regulatory compliance and potential criminal dimensions.

Western Asset has said it conducted its own investigation into the matter, retained outside counsel, and has implemented additional policies and procedures around trade allocations to strengthen controls and oversight. The firm has emphasized a commitment to serving clients and preventing recurrences of the conduct at issue. The SEC settlement’s requirement to distribute the civil penalty to harmed investors through a fair fund mechanism is designed to make affected parties whole to the extent practicable and reinforces the principle that investors should not shoulder the costs of adviser misconduct.

The resolution also includes the closure of the Department of Justice’s investigation of Western Asset itself, with the DOJ notifying the firm that it is no longer a subject of its inquiry and that no further action will be taken. This closure marks a critical development in concluding the broader federal government’s scrutiny of the firm, albeit leaving the individual criminal matter against Leech to proceed. The DOJ’s decision to terminate its investigation into the firm, while continuing litigation against the individual former executive, reflects a delineation between organizational liability and individual culpability in complex financial misconduct cases.

Market analysts and legal observers note that the settlement holds ramifications beyond Western Asset, reinforcing heightened expectations for asset managers’ compliance frameworks, particularly in trade allocation processes and supervisory systems. The SEC’s enforcement action serves as a cautionary signal to other firms about the consequences of failing to prevent or detect trade allocation manipulation or preferential treatment among client accounts, especially within institutional strategies with significant assets at stake. As the industry continues to grapple with compliance challenges amid evolving regulatory priorities, the case is likely to inform internal controls and risk management practices across the asset management sector.

In the coming quarters, investors and market participants will watch for updates on the criminal trial, the administration of the fair fund to compensate harmed investors, and potential regulatory changes or guidance from the SEC to prevent similar misconduct. For Franklin Resources and Western Asset, the settlement removes a significant regulatory overhang, allowing the firm to focus on investment management operations and client relationships. However, the episode may influence future inspections and examinations by the SEC’s Division of Examinations, reinforcing scrutiny on compliance programs and risk controls within advisory firms of all sizes.