On Jan 27, the Securities and Exchange Commission (SEC) along with the U.S. Department of Labor declared settlements worth over $21 million with California-based Western Asset Management Co. – a 100% subsidiary of Legg Mason Inc. (LM - Free Report) . The company has faced allegations of hiding losses from clients in employee benefit schemes due to a coding error along with charges of involvement in illegal cross trades.
According to the terms of the settlement, Legg Mason will not accept the allegations nor contradict them, while the company will compensate the affected employee benefit schemes of $17.4 million in addition to a fine of $3.6 million. Notably, a greater part of such payment will be under insurance coverage and will not weigh on the company’s financials.
Here is a brief look at the charges that led to the regulatory probe.
Concealment of Losses
Back in Jan 2007, Western Asset purchased $50 million Glen Meadow securities for its clients. Such securities were barred from being sold to Employee Retirement Income Security Act (ERISA) benefits plans. In the compliance database of Western Asset Management, Glen Meadow securities were coded as “asset-backed security” that did not qualify for ERISA.
However, a coding error in the system classified such securities as “corporate debt,” which consequently qualified for ERISA. Precisely, this led to the wrongful allocation of securities in nearly 100 retirement accounts. The error was identified by the company in Oct 2008, but it refrained from taking a prompt action on the matter and informed the concerned investors two years later in Aug 2010 when these investments incurred a loss of around 10%. Further, the investors were denied compensation owing to the loss.
Illegal Cross Trading
During the financial crisis, some clients of Western Asset were willing to offload some bonds to other clients who wanted to purchase them. Though such dealings were expected to be separate arms-length transactions, the company chose a prearranged sale and repurchase cross trade of similar assets.
This arrangement allowed the company and the dealers to reach a common consensus prior to the sale. The dealers bought securities from Western Asset’s selling client account and sold those to the buying client account of Western Asset, thereby avoiding exposure to the market.
Western Asset saved around $12.4 million in market transaction costs and in a partial move allotted the entire benefit to its purchasing clients, which cost the selling clients $6.2 million.
The latest issue is believed to have significantly hurt investors’ confidence in the midst of an increasing need for transparency and legitimacy in corporate affairs along with the protection of investor rights. However, the current settlement comes as an example for other institutions violating law and engaging in such malpractices.
Legg Mason currently holds a Zacks Rank# 2 (Buy).
Some better-ranked investment management firms include Artisan Partners Asset Management Inc. (APAM - Free Report) , Calamos Asset Management Inc. (CLMS - Free Report) and Fortress Investment Group LLC (FIG - Free Report) . All these stocks carry a Zacks Rank #1 (Strong Buy).