MANHATTAN (LN) — A federal judge on Monday denied cross-motions to exclude expert testimony in the securities and commodities fraud prosecution of S. Kenneth Leech II, the former Chief Investment Officer or Co-Chief Investment Officer of Western Asset Management Company, ruling that none of the six proposed experts — three for the government, three for the defense — crossed the threshold for exclusion under Daubert or the Federal Rules of Evidence.
Leech faces a five-count indictment returned on November 25, 2024, charging investment adviser fraud, securities fraud, commodity trading advisor fraud, commodities fraud, and making false statements. The government alleges he ran a cherry-picking scheme from January 2021 through October 2023, executing Treasury futures and options trades and then allegedly waiting to observe first-day performance before routing profitable trades to a favored strategy called Macro Opportunities and allocating underperformers to the Core Strategies he managed for other clients.
U.S. District Judge Gregory H. Woods, sitting in the Southern District of New York, held that the government's experts — Harvard Business School Professor Lauren Cohen, also a Research Associate at the National Bureau of Economic Research, and NYU Courant Institute Clinical Professor Petter Kolm — had used sufficiently reliable methods in calculating first-day and pre-allocation returns from WAMCO trade blotter data. Cohen proposes to testify that trades Leech allocated to Macro Opps during the relevant period had an average first-day return of $243,000, while trades allocated to the Core Strategies had an average first-day return of negative $309,000.
The defense had argued that both government experts built their analyses on a flawed assumption — that the time a trade was recorded as allocated in WAMCO's system accurately reflected when Leech actually made his allocation decision — pointing to evidence that a lag of up to seven hours sometimes separated Leech's oral instruction to his trading assistant from the assistant's entry into the system. Woods rejected that as a basis for exclusion, holding that whether the times in the WAMCO trade blotter accurately reflect the times that Leech decided where to allocate a trade is a factual dispute for the jury to resolve, and noting that the government plans to introduce evidence that the defendant routinely told his assistants how to allocate trades late in the day and that those assistants promptly entered the allocations in WAMCO's systems.
The defense's centerpiece rebuttal was the Charles River Associates Exercise, a blind allocation experiment in which NYU Stern Clinical Professor of Finance Bruce Tuckman — shielded from knowledge of Leech's actual allocation decisions and first-day performance data — was tasked with allocating 935 trades across 50 randomly selected trading days using only portfolio duration and convexity information. Defense consultant Aaron Dolgoff, a Charles River Associates vice president, proposes to testify that Tuckman's allocations matched Leech's 56.8% of the time — a result the defense calls statistically significant — and that Tuckman's blind allocations nonetheless generated statistically significant first-day performance differences between the two strategies, undermining the government's theory that such differences could only result from cherry-picking.
The government argued the exercise was unreliable because it was never independently tested, because Tuckman could not allocate trades 50/50 as Leech could, and because Tuckman's stated rationales did not consistently match his individual trade decisions. Woods rejected each argument, holding that the exercise's design reflected sufficient intellectual rigor and that the government's critiques went to weight rather than admissibility. He also denied the government's motion to exclude regression testimony from defense experts Dolgoff and Bryant University Finance Department Chair Kevin Maloney, holding that their methodological choices were appropriate to the rebuttal purposes they served.
Woods did flag one recurring language problem on both sides. The government's experts propose to testify that their analyses are consistent with Mr. Leech using information about the first-day performance of his Treasury futures and options trades in making allocation decisions — phrasing the defense argued impermissibly opined on Leech's state of mind under Federal Rule of Evidence 704(b). Woods held the testimony was not excludable because the experts stop short of expressly stating the inference of knowing, willful intent to defraud, which the rule reserves for the jury. But he cautioned that live testimony could become objectionable if not carefully framed, and ordered the parties to meet and confer within two weeks on mutually agreeable language.
The same concern applied to the defense. Tuckman's disclosure describes his duration and convexity targets as proxies for Leech's market views — a word Woods said may imply that he was attempting to stand in Mr. Leech's shoes, veering toward testimony about Leech's good faith. The meet-and-confer order covers that language as well.
Woods also put the defense on notice that framing the CRA Exercise as disproving the null hypothesis underlying the government's case — language that appeared in the defense's opposition brief but not in the expert disclosures — would likely draw a sustained objection at trial absent scientific justification for applying that statistical term of art to the government's theory of the case.
The trade blotter at the center of the case spans 595,236 rows and 48 columns — 28,571,328 cells of data — covering more than 33,000 trades Leech allegedly placed over the 33-month period charged in the indictment.