Last year, a top Swiss regulator's shock move sent ripples across the bond market. This incident had a profound impact on various stakeholders, including one veteran manager. Ken Leech, a former star manager at Western Asset Management Co., found himself in a difficult situation. Investors in a risky pool of Credit Suisse bonds suffered significant losses when Switzerland's financial regulator ruled the notes worthless after the bank's emergency takeover. Leech had amassed a substantial investment in these AT1 bonds. As his bet on the Swiss bank's debt was wiped out in March 2023, government investigators alleged that he resorted to fraudulent means to prop up his strategy and enhance his earnings.
The Justice Department and SEC's Cases Against Leech
The impact of Credit Suisse's debacle is clearly evident in the criminal and civil cases brought against Leech by the Justice Department and the Securities and Exchange Commission. His attorney has vowed to defend him against the accusations. These parallel complaints show how Leech's bet on Credit Suisse affected the strategies he managed at Wamco. Prosecutors claim that it caused "particularly acute problems" for his prized Macro Opportunities strategy, which was hemorrhaging assets. In March, according to the SEC's court filing, Leech "accelerated" his scheme by allocating millions of dollars of his personal investments into Macro Opps and favoring profitable trades at the expense of other investors.This all came to light months later when an employee noticed irregularities, leading to a review of roughly 17,000 trades directed by Leech over a 34-month period. The investigation cost Wamco more than $50 billion in outflows, tarnished the reputation of a bond-market veteran, and resulted in the Justice Department's charges against Leech last week. His lawyer argues that the government's claims ignore key facts and that Leech received no benefit from the alleged misconduct.The CoCo Conflict
Switzerland's FINMA's stinging decision last year led to a historic loss for holders of more than $17 billion of Credit Suisse's additional tier 1 bonds, also known as CoCo bonds. This move, which overturned conventional seniority claims and forced junior bondholders to bear the brunt, angered investors. It also triggered over 100 claims and lawsuits across Europe and the US as bondholders sought to recoup their losses.For Leech, this was a particularly uncomfortable time as he had been shepherding Wamco's investing operations for years, establishing its reputation as a fixed-income powerhouse. His Macro Opps strategy, a flexible approach that was supposed to reflect Wamco's best ideas, came under pressure a few years ago due to a bet on Russian debt and a misjudgment of interest rates.By early 2021, according to US authorities, Leech was making bets in the bond market and delaying their allocation until the end of the trading session to steer profitable trades into Macro Opps portfolios. Prosecutors allege that by late 2023, he improperly shifted over $600 million of first-day gains to this strategy and $600 million in first-day losses to two other strategies.While the Justice Department's indictment focused on Leech's losses on a Credit Suisse bond, the SEC's lawsuit specifically mentioned AT1s. That month alone, the agency said, Leech allocated trades with more than $100 million in net first-day gains to the portfolios he wanted to boost. He also increased his deferred compensation contribution to this strategy from $142,000 to about $19 million.Leech's pay, which had reached more than $25 million in good years, was tied to the performance of the strategies he managed and was particularly dependent on the success of Macro Opps, where higher fees generated significant revenue relative to its size.Last week, Wamco announced that it has strengthened its policies and practices.READ MORE