Updated Friday, September 4, 2015 as of 5:06 PM ET

SEC Fines Western Asset for Defrauding Clients

(Bloomberg) -- Western Asset Management, a unit of Legg Mason, will pay more than $21 million to settle charges of defrauding clients, the SEC said.

Western Asset, based in Pasadena, Calif., concealed investor losses that resulted from a coding error and engaged in cross trading of mortgage-backed securities that favored some clients over others, the SEC said in a statement today.

The money manager breached its fiduciary duty by failing to disclose and promptly correct an error that resulted in about 100 clients allocating money to a private investment that was prohibited by their retirement plans, the SEC said. Western Asset should have reimbursed its clients for the losses on the investment, which had fallen in value, instead of failing to notify clients until two years later, after it had liquidated the investment from their accounts.

“These resolutions represent negotiated settlements of the outstanding matters in which Western neither admits nor denies the charges,” Mary Athridge, a spokeswoman for Baltimore-based Legg Mason, said in an e-mailed statement. “These issues and forthcoming payments have not and will not have any material impact on Western’s financial condition.”


Western Asset is Legg Mason’s largest affiliate, managing $443 billion in fixed-income assets as of Sept. 30. Bond funds managed by Western Asset lagged behind peers after investing in riskier securities during the 2008 crisis.

Separately, the firm sold some mortgage-backed securities and similar assets from client accounts to broker-dealers and then back to different Western Asset clients as they fell in value during the credit crisis, according to the SEC. Western Asset didn’t disclose the transactions to the market and sellers were harmed, the SEC said.

The Labor Department said in a separate statement the cross trading occurred from 2007 through 2010 and the prohibited transactions in the private investment happened from Jan. 31, 2007, through June 12, 2009.

Western will pay $10 million to harmed clients for the coding error, $1 million as an SEC penalty and $1 million as a Labor Department penalty. For the cross trading, the firm will pay $7.4 million to affected clients, $1 million as an SEC penalty and $607,717 to the Labor Department settlement.

Legg Mason shares fell 1.6 percent to $41.54 at 1:59 p.m. in New York, as the 20-company Standard & Poor’s index of asset managers and custody banks declined 0.8 percent.

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