The SEC Wants $3 Million From the Manager at the Centre of a Cherry-Picking Case. His Firm Already Paid $100 Million.

The Securities and Exchange Commission filed a motion on October 6 seeking final judgment against Stephen Kenneth Leech II, who was co-chief investment officer of Western Asset Management Company. The proposed judgment would impose a $3 million civil penalty, an officer-and-director bar and a permanent injunction against future violations of the antifraud provisions. The Commission said an associational bar would follow.

The conduct the SEC describes is called cherry-picking, and the case is a useful illustration of how it works and why it is hard to hide for long.

What cherry-picking is

An investment adviser managing many client portfolios will often place a single large order rather than dozens of small ones. One order gets one execution price, which is usually better for everyone than a series of smaller fills. The adviser then allocates the filled trade across the accounts it was intended for.

The allocation is supposed to be decided before the trade is placed, or at least before its outcome is known. Cherry-picking is the practice of waiting: placing the order, watching how it performs, and only then deciding which accounts receive it. Winning trades go to one set of portfolios, losing trades to another. No fabricated prices are needed and no money leaves the firm. The adviser simply moves the first day's gains and losses between clients.

What the SEC alleges happened here

According to the Commission, between January 2021 and October 2023 Leech delayed trade allocations until after futures market settlement prices had been set for the day. That timing let him allocate gains disproportionately to favoured portfolios and losses to disfavoured ones. The SEC describes the conduct as involving hundreds of millions of dollars in first-day gains and losses.

"The conduct by Leech and Western Asset was an egregious breach of fiduciary obligations to their clients," said Brent Wilner, Associate Director of the SEC's Los Angeles Regional Office.

The firm settled first

On June 5, 2026 the Commission entered a settled order against Western Asset Management Company itself. The order found violations of Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 under it, together with a failure reasonably to supervise under Section 203(e)(6). The firm was censured and ordered to cease and desist, and agreed to a $100 million civil penalty without admitting the findings.

The order states that Western Asset was aware the former co-chief investment officer's allocation practices diverged from those of its other portfolio managers and failed to take reasonable steps to prevent the conduct. The penalty is to be deposited into a Fair Fund — a mechanism under the Sarbanes-Oxley Act that lets the Commission distribute penalty money to injured investors rather than remitting it to the Treasury. Combined with the proposed judgment against Leech, the SEC puts the total at $103 million returned to harmed investors.

Why the pattern shows up in the data

Cherry-picking leaves a statistical signature. If allocations are made without regard to outcome, the first-day returns of trades landing in any one account should look like the first-day returns of the whole block over time. When one set of accounts persistently receives the better half of the distribution and another set the worse half, the asymmetry compounds across hundreds of trades into something no plausible run of luck explains. Regulators and firms' own compliance systems test for exactly that divergence.

The criminal track

Separately from the civil case, Leech pleaded guilty to obstruction of justice in connection with false testimony given to the SEC. Sentencing is pending in the US District Court for the Southern District of New York.