Court Enters $3 Million Consent Judgment Against Former Western Asset Co-CIO Ken Leech: Cherry-Picking Allegations and the Lesson of Late Trade Allocations

This commentary is general information, not legal advice. Rules and their interpretations change; check the current rules or consult counsel before acting on anything here.

By Mark J. Astarita, Esq.

On October 6, 2026, the SEC moved in the Southern District of New York for entry of a final judgment by consent against Stephen Kenneth Leech (also known as Stephen Kenneth Leech II), the former co-chief investment officer of registered investment adviser Western Asset Management Company LLC. On October 7, 2026, Judge Katherine Polk Failla signed the Final Judgment, and it was filed as ECF No. 30. SEC v. Stephen Kenneth Leech, No. 1:24-cv-09017 (S.D.N.Y. filed Nov. 25, 2024); SEC Press Release 2026-103; Litigation Release No. 26666.

Two points up front. First, when the SEC announced the settlement on October 6, the judgment was only proposed and subject to court approval. The court entered it the next day, on the same terms as the proposed judgment the SEC posted with its litigation release. Second, Leech consented without admitting the allegations of the complaint, except for jurisdiction and a bankruptcy-discharge stipulation discussed below. What follows about the scheme comes from the SEC’s November 2024 complaint and is allegations only.

What the SEC Alleged

According to the complaint, from at least January 2021 through October 2023, Leech was a named portfolio manager for several Western Asset strategies, including Macro Opportunities (“Macro Opps”), Core, and Core Plus. He traded primarily Treasury futures and options on Treasury futures, through omnibus accounts at several brokers.

The complaint alleges that:

• Western Asset’s compliance department repeatedly told portfolio managers to allocate trades promptly after execution. The complaint quotes a June 2018 training warning that regulators were “looking at time stamps,” an August 2021 compliance email citing SEC cherry-picking cases, and a June 2022 training describing a “bad facts scenario” in which a trade executed at 8 a.m. is allocated at noon after the market moves.
• Leech typically did not use the firm’s electronic system to pre-allocate. He predominately placed trades by phone, starting at about 5 a.m. Pacific Time, and usually gave his trade assistant the allocations for most of a day’s trading in a single call at about 1 p.m. Pacific (4 p.m. Eastern), after the CME settlement price was set. For six of the seven brokers he used, which accounted for about 65% of his trading, there was no default allocation instruction.
• Over the period, Leech allocated more than $600 million of trades with net first-day gains to “Favored Portfolios” (primarily Macro Opps) and more than $600 million of trades with net first-day losses to “Disfavored Portfolios” (primarily Core and Core Plus). The SEC alleges that the probability of that pattern occurring by chance is less than one in one trillion.
• The complaint describes a motive: because of fee differences, each dollar of assets in Macro Opps could generate roughly four times as much revenue for Western Asset as a dollar in Core and Core Plus, and Leech’s bonus was tied to firm profits. The complaint also alleges that in 2023 Leech reduced his own deferred compensation investment in Core and Core Plus from about $19.4 million in January 2023 to about $143,000 by August 2023. It alleges that in March 2023, a month in which he allocated more than $100 million in net first-day gains to Favored Portfolios, he increased his deferred compensation investment in Macro Opps from about $142,000 to about $19 million.

The complaint charged violations of Securities Act Section 17(a)(1) and (3), Exchange Act Section 10(b) and Rule 10b-5(a) and (c), Advisers Act Sections 206(1) and 206(2), and Investment Company Act Sections 36(a) and 37.

The Settlement

Under Leech’s consent (signed September 22, 2026, and filed October 6, 2026) and the Final Judgment entered October 7, 2026, Leech is:

• permanently enjoined from violating Securities Act Section 17(a)(1) and (3), Exchange Act Section 10(b) and Rule 10b-5(a) and (c), Advisers Act Sections 206(1) and 206(2), and Investment Company Act Section 36(a);
• ordered to pay a $3,000,000 civil penalty; and
• prohibited from acting as an officer or director of any issuer that has a class of securities registered under Exchange Act Section 12 or that is required to file reports under Exchange Act Section 15(d).

The judgment does not set any disgorgement amount; disgorgement is mentioned only in its penalty-offset and bankruptcy-discharge provisions.

The consent states that the penalty may be distributed through a Fair Fund. Leech may not seek indemnification or insurance reimbursement for it, may not deduct it for tax purposes, and may not use it to reduce damages in related investor actions. For bankruptcy-discharge purposes only, he stipulates that the allegations of the complaint are true. The SEC also states that Leech “agreed to a forthcoming associational bar.” That bar is not in the consent or the judgment, and the SEC’s releases do not say when or how it will be imposed.

Related Matters (per the SEC)

The SEC’s release states that in June 2026 the Commission instituted settled administrative proceedings against Western Asset, which ordered a $100 million civil penalty and created a Fair Fund for investors in the disfavored portfolios. The release also states that Leech pleaded guilty in June 2026 in the Southern District of New York to obstruction of justice charges related to false and misleading testimony he gave the SEC, with sentencing to come. The SEC says the two resolutions together would return $103 million to harmed investors. I have not reviewed the Western Asset order or the criminal docket for this post. Those facts are taken from the SEC’s release.

Practical Takeaways for Advisers and CCOs

1. 
   

   Allocation timing matters as much as allocation outcome. The case, as alleged, rests on the gap between execution and allocation. If a portfolio manager can see the market before deciding which client gets a trade, the firm has a cherry-picking risk whether or not anyone means to cheat.

   
   
2. 
   

   Training is not a control. Western Asset’s CCO, according to the complaint, described this exact risk in trainings and emails. The alleged conduct continued anyway. Pre-allocation requirements, system-enforced default allocations, and exception reports that flag late allocations do more than reminders.

   
   
3. 
   

   Run the numbers. The SEC’s case relies heavily on first-day returns by portfolio. Firms with discretionary multi-account trading should be running the same analysis on themselves, especially where accounts pay different fees.

   
   
4. 
   

   Fee differences are a conflict. The complaint ties the alleged motive directly to different fee structures across strategies run by the same manager. That kind of conflict deserves particular surveillance and disclosure attention.

   
   
5. 
   

   Personal investments can become evidence. The alleged shifts in Leech’s deferred compensation are a reminder that employees’ personal holdings in firm products can become part of the case.

   
   

Sources: SEC Press Release 2026-103 (Oct. 6, 2026); SEC Litigation Release No. 26666 (Oct. 6, 2026); Complaint, SEC v. Leech, No. 1:24-cv-09017 (S.D.N.Y. Nov. 25, 2024); Consent of Defendant Stephen Kenneth Leech (ECF No. 29-1, filed Oct. 6, 2026); proposed Final Judgment (ECF No. 29-2, filed Oct. 6, 2026), all available at https://www.sec.gov/enforcement-litigation/litigation-releases/lr-26666; Final Judgment as to Defendant Stephen Kenneth Leech (ECF No. 30, signed and filed Oct. 7, 2026).

If your firm is facing an SEC examination or investigation, the time to get experienced counsel involved is early, before positions are taken and documents are produced. Please feel free to contact me to discuss your situation.

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