When investors hear the phrase “cherry-picking,” it may sound like an internal portfolio-management issue. In reality, regulators treat it as one of the most serious forms of investment adviser misconduct because it can quietly shift gains to favored accounts while leaving other investors with losses.

“Cherry picking is a very serious offense, where Leech was accused of disproportionately allocating better performing trades to certain favored portfolios, and worse performing trades to other portfolios, and thus investors in the less favored portfolio were harmed,” said Jeffrey Sonn, a nationally known securities lawyer.

That is the core investor-protection issue behind Western Asset Management Co. LLC’s recent $100 million settlement with the Securities and Exchange Commission. According to the SEC, Western Asset failed to take reasonable steps to detect and prevent alleged cherry-picking by former co-Chief Investment Officer Stephen Kenneth “Ken” Leech. The SEC’s order states that the firm knew or should have known that Leech’s trading and allocation practices diverged from those of other portfolio managers, yet failed to ensure that his actions were consistent with the firm’s fiduciary duties and disclosures to clients. (SEC: https://www.sec.gov/enforcement-litigation/administrative-proceedings/ia-6969-s)

Why Trade Allocation Matters

Investment advisers often place block trades before allocating those trades among client accounts. That process can be legitimate when handled fairly, consistently, and in accordance with written policies.

The problem arises when an adviser or portfolio manager waits to see how trades perform before deciding which accounts receive the profitable trades and which receive the losing trades. That is the essence of cherry-picking.

The alleged harm is not always obvious to investors in real time. A client may simply see weaker performance, unexplained underperformance compared with similar portfolios, or losses that appear to be the result of ordinary market movement. But if the account was systematically placed on the wrong side of trade allocations, the investor may have been disadvantaged by misconduct rather than market risk.

The SEC’s Message to Investment Advisers

The Western Asset settlement is significant because the SEC’s order did not merely focus on the alleged conduct of one individual. It focused on firm-level failures: supervision, compliance controls, allocation procedures, and the adviser’s fiduciary duty to treat clients fairly.

The SEC alleged that Western Asset failed to implement policies and procedures relating to reallocations and failed reasonably to supervise Leech. Without admitting or denying the SEC’s findings, Western Asset agreed to a cease-and-desist order, a censure, and a $100 million civil penalty that will be placed into a Fair Fund for harmed investors. (SEC Order: www.sec.gov/files/litigation/opinions/2026/ia-6969.pdf)

That matters because investors often assume a large, sophisticated asset manager has robust internal controls. The SEC’s action is a reminder that even major firms can face liability when alleged red flags are not addressed.

What Investors Should Watch For

Investors who held Western Asset-managed portfolios during the relevant period may want to review whether their accounts experienced unusual underperformance compared with similar strategies, unexplained allocation patterns, or losses that appeared inconsistent with the stated investment approach.

The SEC previously alleged that Leech engaged in a multi-year cherry-picking scheme from at least January 2021 through October 2023 by allocating favorable trades to certain portfolios and unfavorable trades to others. (SEC Litigation Release: www.sec.gov/enforcement-litigation/litigation-releases/lr-26183)

Federal prosecutors separately charged Leech in November 2024, alleging that more than $600 million in gains were assigned to favored clients while more than $600 million in losses were assigned to disfavored clients. Leech has pleaded not guilty, and the criminal case remains separate from Western Asset’s SEC settlement. (DOJ: www.justice.gov/usao-sdny/pr/former-chief-investment-officer-global-bond-investment-firm-charged-over-600-million)

The Bigger Investor Recovery Question

A regulatory settlement does not automatically resolve every investor’s potential claim. A Fair Fund may provide some distribution to harmed investors, but investors should still evaluate whether they have separate legal rights based on their specific losses, account type, advisory relationship, and the role of any broker, adviser, platform, or institution that recommended or placed them into the affected strategy.

For investors, the deeper lesson is simple: performance losses are not always just performance losses. When trade allocation misconduct is alleged, the question becomes whether the investor received the fair treatment they were promised.

Sonn Law Group continues to monitor developments involving Western Asset Management, Ken Leech, and related investor recovery issues.