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Franklin Templeton’s stock plummeted on Wednesday after it put a top bond investor on leave and disclosed that regulators have warned that he could face civil charges in federal investigations into suspicious trading.
The $1.6tn manager’s stock fell 12.5 per cent on Wednesday as it announced that Ken Leech, who served as co-chief investment officer at its subsidiary Western Asset Management, has been put on leave.
Franklin disclosed last month that the Securities and Exchange Commission and the Department of Justice were investigating Western Asset’s derivatives trades for wealthy customers. It added on Wednesday that Leech had received a so-called Wells notice from the SEC, a formal document that is often but not always followed by enforcement action.
The tumble in the share price and the sudden loss of the 34-year veteran are a blow for California-based Franklin Templeton. The family-run firm has recently sought to reinvent itself through a series of acquisitions, including the 2020 purchase of Legg Mason, which also included Western Asset.
One analyst who covers asset management said the share price drop reflected concerns that the probe could expand and prompt investors to pull out their assets from its funds.
“The fear is that there will be outflows as a result of this,” the analyst said. “Institutional investors don’t take this lightly, so this may happen in flows, and you’ll see it in the flow dynamic next month.”
Western Asset was conducting “an internal investigation into certain past trade allocations involving treasury derivatives in select Western Asset-managed accounts” and was “co-operating with parallel government investigations”, according to the SEC filings.
The SEC and federal prosecutors declined to comment. A spokesperson for Western Asset said the firm itself had not received a Wells notice and could not provide a timeline for the internal investigation.
Leech, who has more than 45 years of experience in the investment industry, had ceded his duties to co-CIO Michael Buchanan, according to a company statement.
“We are confident Mike’s leadership, extensive experience and deep commitment to Western Asset will ensure not only a seamless transition, but also that our clients and our team are in good hands,” said Jim Hirschmann, Western Asset’s chief executive and president.
Western also announced that in light of Leech’s absence, the group planned to close $2bn in bond products that Leech had co-managed.
The Western Asset Macro Opportunities fund that he ran is down about 1.8 per cent year-to-date and 3.1 per cent over the past three years, trailing virtually all of its peers, according to Morningstar data. It has seen more than $1bn in net outflows since August 2021, and Western Asset as a whole has had more than $29bn in outflows over the period.