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.
). 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
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).
ARTISAN PTNR AM (APAM): Free Stock Analysis
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LEGG MASON INC (LM): Free Stock Analysis
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Some better-ranked investment management firms include
Artisan Partners Asset Management Inc.
Calamos Asset Management Inc.
Fortress Investment Group LLC
). All these stocks carry a Zacks Rank #1 (Strong Buy).