SEC Charges Legg Mason Affiliate With Defrauding Clients

In January 2014, the SEC announced that it has sanctioned California-based investment adviser, Western Asset Management Company, for hiding investor losses that resulted from a coding error and engaging in trading that favored some clients over others. Western Asset, a subsidiary of Legg Mason, agreed to pay more than $21 million to settle the SEC’s charges as well as a related matter.

According to the SEC, Western Asset provides investment management services primarily to institutional clients, many of which are ERISA plans. Western Asset breached its fiduciary duty by failing to disclose and correct a coding error that caused the improper allocation of a restricted private investment to the accounts of nearly 100 ERISA clients. ERISA plans are prohibited from making that type of private investment and the investment had dropped significantly in value by the time the coding error was discovered. Although Western Asset was obligated to reimburse clients for the losses, it failed to notify its ERISA clients until nearly two years later, long after the firm had sold the prohibited securities out of the accounts.

The SEC has stated that Western Asset placed its own interests ahead of its clients by failing to inform clients about the error, which enabled Western Asset to avoid reimbursing clients for their losses.

The SEC also found that Western Asset illegally moved securities from one client account to another when it was required to sell mortgage-backed securities and similar assets into a sharply declining market as clients made liquidation requests.