SEC Fines Western Asset $100 Million Over Failures Tied to Former Investment Chief’s Alleged Cherry-Picking Scheme

Key Takeaways

• $100 Million Settlement Reached: Western Asset Management agreed to pay a $100 million civil penalty to settle SEC charges related to supervisory and compliance failures connected to an alleged cherry-picking scheme.
• Former co-CIO Remains Subject of Separate Litigation: The SEC previously alleged that Western Asset's former co-chief investment officer improperly allocated profitable trades to favored portfolios while assigning losing trades to others between 2021 and 2023.
• Compliance Failures Cited: Regulators found the firm failed to take reasonable steps to detect and prevent the conduct despite being aware that the former executive's trading and allocation practices differed from those of other portfolio managers.
• Policies and Supervision Deemed Inadequate: The SEC said Western Asset failed to implement controls governing trade reallocations and did not reasonably supervise the former co-CIO.

Deep Dive

Pasadena-based Western Asset Management has agreed to pay a $100 million civil penalty to settle Securities and Exchange Commission charges that it failed to detect and prevent an alleged cherry-picking scheme carried out by its former co-chief investment officer.

The settlement is the latest development in a case that has drawn attention across the asset management industry because it centers not on a firm's investment strategy, but on how trades were allocated among client portfolios and whether internal controls were sufficient to protect investors.

According to the SEC, the firm's former co-CIO engaged in a scheme between January 2021 and October 2023 that allegedly directed profitable trades to certain favored portfolios while assigning less favorable trades to others. The Commission first brought those allegations in a litigated federal court action in November 2024.

The regulator alleges that hundreds of millions of dollars in trades with net realized and unrealized first-day gains were disproportionately allocated to favored accounts, while hundreds of millions of dollars in trades with net realized and unrealized first-day losses were assigned to disfavored portfolios.

Friday's settlement focuses on Western Asset's conduct rather than the underlying allegations against its former executive.

According to the SEC's order, the firm failed to take reasonable steps to detect and prevent the alleged misconduct despite information that should have prompted greater scrutiny. Regulators found that Western Asset was aware that its former co-CIO's trading and allocation practices differed from those of other portfolio managers at the firm and either knew, or should have known, about those practices.

The Commission said the firm failed to take reasonable measures to ensure that those allocation decisions remained consistent with its fiduciary obligations and with representations made to clients that investment allocations would be conducted in a fair and equitable manner.

The order also found that Western Asset failed to implement policies and procedures governing trade reallocations and did not reasonably supervise the former executive. The SEC concluded that the firm willfully violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940, along with Rule 206(4)-7, and failed reasonably to supervise the former co-CIO under Section 203(e)(6) of the Advisers Act.

Without admitting or denying the SEC's findings, Western Asset agreed to a cease-and-desist order, a censure, and the $100 million penalty. The Commission said the funds will be placed into a Fair Fund for distribution to investors harmed by the conduct described in the order.

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