(January 27, 2014) — Western Asset Management, a unit of Legg Mason, has agreed to pay $21 million in settlements for illegal cross-trading of securities, according to the US Department of Labor and Securities and Exchange Commission (SEC).
The investigation found Western Asset had purchased nearly $90 million of prohibited securities using funds from accounts covered by the Employee Retirement Income Security Act (ERISA), such as Glen Meadow Pass-Through Trust Securities. The fixed-income management firm then saw significant losses in 99 employee benefit plans and investment funds holding plan assets from January 2007 to June 2009.
“Workers invest too much in retirement plans to have them diminished by the very people they trust to grow their savings,” said US Secretary of Labor Thomas Perez. “The department is committed to protecting retirement savings so that more of America’s workers have the opportunity to build nest eggs and live securely when they retire.”
The SEC has mandated the firm to pay $17.4 million to employee benefit plans and more than $3.6 million in penalties. Western Asset had $442 billion in assets under management as of September 2013.
“The investigation determined that the company’s own compliance system recognized that the terms of the securities prohibited their ownership by ERISA-covered entities,” the SEC said in a press release. “However, Western Asset overrode the system, allowing the accounts to improperly purchase and hold the securities in their portfolios.”
Western Asset also participated in 514 cross-trades involving ERISA accounts, the SEC stated.
From 2007 to 2010, the Pasadena-based firm sold fixed-income securities from client accounts to brokers, only to repurchase the same securities from the same dealers at a mark-up, in a deal that heavily favored the buyers. These disparities in pricing have cost some ERISA-covered accounts $6.2 million, according to the SEC.
“Western Asset violated its fiduciary duty to act solely in the best interest of its plan clients,” said Assistant Secretary of Labor for Employee Benefits Security Phyllis Borzi. “Its failure to follow not only the law, but its own rules, cost hard-working employees millions of dollars.”
Legg Mason spokeswoman Mary Athridge said in a statement that the company’s insurance would cover most of the settlement.
“Western chose to settle the matters to avoid the uncertainty, expense, and distraction of litigation,” she said.
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