U.S. District Judge Gregory H. Woods on Friday rejected arguments from both sides that various expert analyses were unreliable or would confuse the jury in the prosecution of S. Kenneth Leech II, the former Chief Investment Officer of Western Asset Management Company (WAMCO). The case involves allegations that Leech ran a cherry-picking scheme from January 2021 through October 2023, waiting to see how Treasury futures and options trades performed before routing winners to a favored strategy called Macro Opportunities and losers to the Core Strategies he managed for other clients.
Leech faces five counts, including investment adviser fraud, securities fraud, and commodities fraud, stemming to government allegations of the scheme. He has not been convicted.
The government's two case-in-chief experts—Harvard Business School Professor Lauren Cohen and NYU Courant Institute Professor Petter Kolm—propose to testify that trades Leech allocated to Macro Opps had an average first-day return of $243,000, while trades he allocated to the Core Strategies had an average first-day return of negative $309,000, and that permutation testing ruled out random chance as an explanation.
The defense countered with a blind allocation exercise designed by Charles River Associates Vice President Aaron Dolgoff and performed by NYU Stern Professor Bruce Tuckman, a former Chief Economist of the Commodity Futures Trading Commission. In the exercise, Tuckman allocated 935 of Leech's trades without knowing first-day performance and still matched Leech's actual allocation decisions 56.8 percent of the time, a result the defense argued was statistically significant.
Woods rejected the government's request to exclude the exercise entirely, finding the exercise's design sufficiently reliable and concluding that the government's critiques go to its weight, not its admissibility.
On the defense side, the government's sharpest challenge targeted a regression variable that Dolgoff created—dubbed the Convexity Effect Offset—which the government argued was reverse-engineered to mimic pre-allocation returns and was flatly inconsistent with Leech's sworn SEC testimony that he typically had an allocation in mind when he placed a trade. Woods declined to exclude it, noting that the Sixth Amendment demands that defendants be allowed to present wholly inconsistent defenses and that challenges to the factual basis of an otherwise reliable methodology are quintessential jury issues.
The defense's Rule 704(b) challenge—arguing that the government's experts impermissibly opined on Leech's mental state by testifying that his allocation patterns were consistent with him using first-day performance information—fared no better. Woods drew a line between testimony about conduct and testimony about the mental state element of the charged crimes, analogizing the government's experts to a narcotics detective testifying that drugs found in a car were more consistent with distribution than personal use. The experts, he wrote, do not propose to state the inference that Leech acted knowingly, willingly, and with an intent to defraud—and leaving that inference for the jury is precisely what Rule 704(b) requires.
Woods did flag three phrasing problems that could generate trial objections: the government experts' use of the word using in connection with allocation decisions, Professor Kolm's use of influenced, and Professor Tuckman's description of his duration and convexity targets as proxies for Leech's market views—language the judge said veers close to testimony about Mr. Leech's mental state. He ordered the parties to meet and confer on mutually agreeable language and to file a status letter within two weeks.
Woods also warned that the defense's characterization of the CRA Exercise as testing a null hypothesis underlying the government's case is problematic and said he expects to sustain objections to such framing absent scientific justification.
The defense's trade blotter, produced in discovery, spans 595,236 rows and 48 columns—28,571,328 cells of data—covering more than 33,000 trades Leech placed over the 33-month period covered by the indictment.