A shock move by a top Swiss regulator last year sparked outrage across the bond market. For at least one veteran, it turned into something much worse.
Investors in a risky pool of Credit Suisse bonds got crushed when Switzerland’s financial regulator ruled the notes were worthless in the wake of the failing bank’s emergency takeover by rival UBS Group AG.
Ken Leech, a one-time star manager at Western Asset Management Co. who the US accused last week of defrauding clients, had amassed a significant investment in those so-called AT1 bonds. As his bet on the Swiss bank’s debt got wiped out in March 2023, government investigators allege that he plunged deeper into a fraudulent scheme to prop up his marquee strategy and burnish his own earnings.
The impact of Credit Suisse’s debacle is highlighted in both the Justice Department and Securities and Exchange Commission’s criminal and civil cases against Leech, whose attorney has vowed to fight the accusations. With varying degrees of detail, the parallel complaints show how a bet on Credit Suisse hit many of the strategies Leech helped shepherd at Wamco — and in the words of prosecutors, “caused particularly acute problems” for his prized Macro Opportunities strategy that was hemorrhaging assets.
That March, Leech “accelerated” his scheme, according to the SEC’s court filing, allocating millions of dollars of his personal investments into Macro Opps and ramping up a practice of steering quickly profitable trades to the strategy at the expense of investors in other vehicles.
It all unraveled months later after an employee flagged irregularities, prompting the bond house to embark on a review of roughly 17,000 trades directed by Leech over a 34-month span. This eventually cost Wamco more than $50 billion in outflows as the investigation progressed, sullied the standing of a bond-market veteran and resulted in the Justice Department’s charges against Leech last week.
His lawyer has said the government’s claims “ignore key facts, including the fundamental differences between distinct fixed-income strategies and the irrelevance of first-day performance to managing these strategies.” Leech received no benefit from the alleged misconduct, according to his lawyer.
Authorities haven’t accused Wamco of wrongdoing.
CoCo Conflict
The stinging decision 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 contingent convertible or CoCo bonds meant to serve as shock absorbers when banks start to fail and are thus considered risky.
But the step to upend conventional seniority claims, and forcing junior bondholders to take a hit before common shareholders, angered investors. It also led to more than 100 claims and lawsuits across Europe and the US by singed bondholders seeking to recoup losses.
It came at a particularly uncomfortable time for Leech, who for years shepherded Wamco’s investing operations, cementing its standing as a fixed-income powerhouse.
Macro Opps – a sort of go-anywhere unconstrained approach that Leech heralded as reflecting Wamco’s best ideas — came under pressure a few years ago, hurt by a bet on Russian debt and a mistaken view on interest rates.
By early 2021, US authorities claim, Leech was placing bets in the bond market and then waiting until the end of the trading session to allocate them — steering those that profited quickly into Macro Opps portfolios. Prosecutors allege that by late 2023, he improperly shunted over $600 million of first-day gains toward that strategy and over $600 million in first-day losses into two others.
While the Justice Department’s indictment said Leech was wiped out on a Credit Suisse bond, the SEC’s lawsuit specified that it was AT1s. That month alone, the agency said, Leech allocated trades with more than $100 million in net first-day gains to the portfolios he sought to boost. He also boosted his deferred compensation contribution into that strategy to about $19 million from $142,000, it said.
Leech’s pay, which in the good years soared to more than $25 million, was tied to the performance of the strategies he ran and was in particular beholden to the success of Macro Opps, where higher fees yielded outsized revenue relative to its size.
Last week, Wamco said it has strengthened policies and practices.
