Complex Expert Testimony on Trading Allocations Admitted in Western Asset Fraud Case

MANHATTAN (LN) — U.S. District Judge Gregory H. Woods on Friday denied cross-motions to exclude expert testimony in the government’s fraud case against S. Kenneth Leech II, allowing statistical analyses of his Treasury futures and options trades to proceed to trial.

The government alleges that Leech, who served as Chief Investment Officer at Western Asset Management Company, engaged in a fraudulent “cherry-picking” scheme from January 2021 through October 2023. The indictment accuses Leech of executing trades and then allocating well-performing positions to favored accounts, such as the “Macro Opps” strategy, while dumping underperforming trades into disfavored accounts like the “Core Strategies.”

To prove the scheme, the government proffered experts Professor Lauren Cohen of Harvard Business School and Professor Petter Kolm of New York University. Their analyses relied on WAMCO trade blotters containing over 33,000 trades to calculate first-day and pre-allocation returns. Professor Cohen proposed testifying that trades allocated to Macro Opps had an average first-day return of $0.24 million, while those allocated to Core Strategies averaged a loss of $0.31 million.

The defense moved to exclude the government’s experts, arguing their methods were unreliable and that their testimony improperly invaded the jury’s role by opining on Leech’s state of mind. The defense also challenged the experts’ use of end-of-day prices as proxies for allocation-time prices, citing a lag of up to seven hours between Leech’s oral instructions and their entry into WAMCO’s systems.

Woods rejected the state-of-mind argument, ruling that the experts’ use of words like “using” and “driven” described conduct and cause-and-effect relationships rather than impermissible opinions on Leech’s intent. Woods wrote that the defense misconstrues Professor Cohen’s use of the word “driven,” noting that the object of the word is a potential explanation of the first-day performance differential, not Mr. Leech.

The judge also found the government’s methodology sufficiently reliable, noting that the defense’s challenges to the factual basis of the proxies went to the weight of the evidence, not its admissibility. Woods invited the defense to propose a limiting instruction to address any prejudice from evidence regarding Leech’s trading in the “Post Period,” after he lost discretion to allocate trades to Core Strategies.

On the defense side, Woods denied the government’s motion to exclude testimony from Charles River Associates consultant Aaron Dolgoff and NYU Professor Bruce Tuckman. The government argued that the “CRA Exercise,” in which Tuckman allocated trades without knowing their performance, was an unrealistic comparator to Leech’s actual trading.

Woods found the exercise sufficiently rigorous, noting that Tuckman, a former chief economist at the Commodity Futures Trading Commission, employed the same level of intellectual rigor expected in his field. The exercise resulted in a 56.8% match rate with Leech’s actual allocations, a result the defense argued was statistically significant and inconsistent with random chance.

The court did, however, caution both sides on their language. Woods ordered the parties to meet and confer to agree on mutually acceptable phrasing for the experts’ testimony to avoid confusing the jury regarding mental state. He specifically flagged the defense’s use of the term “proxy” to describe Tuckman’s methodology and the government’s use of “using” to describe Leech’s actions as potentially problematic.

Leech faces five counts including investment adviser fraud, securities fraud, and making false statements to the SEC. He previously testified to the SEC that he typically had an allocation in mind when placing trades, a statement the government alleges was false.