Legg Mason Affiliate Charged with Defrauding Clients

It has become nearly commonplace to hear about investors losing large sums of money, often in the millions. Although it is rarely shocking, few stories of investment fraud incite others as much as those involving retirees. Such is the case with the recent SEC investigation of Western Asset Management, a subsidiary of Legg Mason. Western Asset Management is a privately owned asset management company which manages many institutional clients. More than 100 of these clients are pension plans that are governed by the Employment Retirement Income Security Act. (ERISA is a law that was enacted in 1974 with the specific purpose of protecting employees who participate in employee benefit plans.)

The Securities and Exchange Committee has sanctioned this Pasadena, CA.- based company for numerous violations. A coding error resulted in the improper allocation of a private investment to ERISA clients. By the time the coding error was revealed, the bottom had fallen out of the private investment; an investment which was prohibited to ERISA plans. Western Asset’s reticence to acknowledge the coding error for nearly two years resulted in significant losses to investors, even though their correction policy requires them to reimburse clients who suffer losses of this nature. Additionally, by the time they revealed the coding error, those securities had been liquidated.

“When the coding error was discovered, Western Asset put its own interests above its clients and avoided telling investors what had caused losses in their accounts,” said Michele Wein Layne, director of the SEC’s Los Angeles Regional Office. “By concealing the error, Western Asset avoided reimbursing clients for their losses.”

In addition to this violation, the SEC also determined that Western Asset had participated in illegal cross-trading. They were covertly moving a security from one account to another. Although this is a common practice that can often benefit both selling and buying clients by reducing costs, there can also arise a conflict of interest on the part of the advisor in ensuring that the best interests of both clients is represented fairly.

The SEC determined that Western Asset misrepresented the long-term value of certain securities. Instead, they arranged the purchase of these securities from some of their selling clients who, in turn, sold them back to other Western Asset clients with more substantial risk tolerance in prearranged cross-trades. The method by which Western Asset secured these cross-trades, through the use of the bid price as opposed to the average price, resulted in the company inadequately appropriating the total gains of the market savings to the clients who bought these securities. Furthermore, these actions prevented the selling clients from obtaining over $6 million in savings.

Julie M. Riewe, the co-chief of the SEC Enforcement Division, stated, “…by moving securities across client accounts in prearranged, dealer-interposed transactions, Western Asset unlawfully deprived its selling clients of their share of the savings.”

According to the SEC, Western Asset neither admitted nor denied the SEC findings. They did, however, agreed to censure and to stop engaging in such actions in effort to avoid the cost and uncertain outcome that may result from litigation.

In an agreement between the SEC and the Department of Labor, Western Asset will suffer stiff financial ramifications for their actions. Regarding the disclosure violations pertaining to the coding error, the company must pay approximately $12 million, which includes reimbursement to those clients effected. This amount includes the penalties owed to the SEC and the Department of Labor. For the cross-trading violations, Western Asset must distribute more than $9 million to clients and in penalties to the SEC and Department of Labor. They also are required to retain an independent client consultant to ensure that both violations are addressed.

Blum Law Group represents clients who have been victimized by brokers. If you have been negatively impacted by the actions of Western Asset Management’s failure to disclose their coding error or cross-trading practices, please call 877-STOCK-LAW for your free consultation with the Blum Law Group.