The shock move by Switzerland’s main regulator last year sparked outrage in the bond market. For at least one veteran, it turned into something much worse.
Investors in Credit Suisse’s risky bond pool he crushed himself when Switzerland’s financial regulator ruled the notes worthless after an emergency takeover of failed banks by rivals UBS Group AG.
Ken Leechformer star manager at Western Asset Management Co. which is USA charged last week customer fraud, he collected significant investments in these so-called AT1 bonds. While his bet on the Swiss bank’s debt was wiped out in March 2023, government investigators say he fell deeper into the fraudulent scheme to support his bidding strategy and enrich his own earnings.
The impact of the Credit Suisse debacle has been highlighted in criminal and civil proceedings by the Justice Department and the Securities and Exchange Commission against Leech, whose lawyer has vowed to fight the charges. In varying degrees of detail, the parallel complaints show how the Credit Suisse bet hit many of the strategies Leech helped manage at Wamco — and, according to prosecutors, “caused particularly acute problems” for his prized Macro Opportunities strategy, which was hemorrhaging assets.
That March, Leech “accelerated” his scheme, according to the SEC’s court filing, allocating millions of dollars of his personal investments to Macro Opps and ramping up the practice of funneling quickly profitable trades to the strategy at the expense of investors in other vehicles.
It all unraveled a few months later after an employee flagged irregularities, prompting the bond house to launch an audit of roughly 17,000 deals handled by Leech over a 34-month period. That ended up costing Wamco more than $50 billion in outflows as the investigation progressed, tarnished the veteran’s standing in the bond market and resulted in Justice Department charges against Leech last week.
His lawyer said the government’s claims “ignore key facts, including the fundamental differences between different fixed income strategies and the irrelevance of day one performance to managing those strategies.” According to his lawyer, Leech received no benefit from the alleged misconduct.
Authorities have not charged Wamco with wrongdoing.
CoCo clash
A harsh ruling by Switzerland’s FINMA last year translated into a historic loss for holders of more than $17 billion of Credit Suisse’s Additional Tier 1 bonds – a type of borrowing also known as conditional convertible or CoCo bonds that serve as shock absorbers when banks begin to fail and are therefore considered risky.
But the move to nullify conventional seniority claims and force junior bondholders to take the hit before ordinary shareholders angered investors. It also led to more than 100 requests and lawsuits across Europe and the US by undersigned bondholders seeking to recoup losses.
It came at a particularly awkward time for Leech, who for years ran Wamco’s investment operations, consolidating its position as a fixed income power plant.
Macro Opps – the kind of no-holds-barred approach that Leech heralded as a reflection of Wamc’s best ideas – came under pressure a few years ago, hurt by a bet on Russian debt and a misguided view on interest rates.
Until early 2021, U.S. authorities allege, Leech placed bets on the bond market and then waited until the end of the trading session to place them — funneling those who profited quickly into Macro Opps portfolios. Prosecutors allege that by the end of 2023, he improperly diverted more than $600 million in first-day profits to that strategy and more than $600 million in first-day losses to two others.
While the Justice Department’s indictment said Leech was wiped out on the Credit Suisse bond, the SEC’s complaint specified that it was AT1. That month alone, the agency said, Leech allocated trades with more than $100 million in first-day net gains to portfolios he wanted to boost. He also increased his deferred contribution to that strategy to about $19 million from $142,000, it said.
Leech’s salary, which rose to more than $25 million in good years, was tied to the performance of the strategies he led, and he was particularly credited with the success of Macro Opps, where higher fees generated huge revenue relative to its size.
Last week, Wamco said it had strengthened policies and practices.
