MANHATTAN (LN) — U.S. District Judge Gregory H. Woods denied cross-motions to exclude expert testimony on Tuesday case against S. Kenneth Leech, II, a former Chief Investment Officer at Western Asset Management Company, clearing the way for both the government and the defense to present complex statistical analyses of trade allocation to a jury.
Leech, who was indicted in November 2024 on five counts including investment adviser fraud and securities fraud, is accused of engaging in a "cherry-picking" scheme. The government alleges that from January 2021 to October 2023, Leech executed trades in Treasury futures and options, waited to see how they performed, and then allocated well-performing trades to favored accounts and underperforming trades to disfavored accounts.
The government’s experts, Harvard Business School Professor Lauren Cohen and New York University Professor Petter Kolm, propose to testify that their analyses of trade blotters show a statistically significant difference in first-day returns between trades allocated to Leech’s "Macro Opps" strategy and those allocated to "Core Strategies."
Professor Cohen plans to testify that trades allocated to Macro Opps had an average first-day return of about $0.24 million, while trades allocated to the Core Strategies had an average first-day return of about -$0.31 million. He also proposes to testify that regression analyses show "nearly all the explanatory ability behind Mr. Leech's allocation decisions is driven by Pre-Allocation profitability of a trade."
The defense moved to exclude this testimony, arguing that the experts’ use of terms like "using" and "driven" impermissibly opined on Leech’s state of mind in violation of Federal Rule of Evidence 704(b). The defense also argued that the experts’ reliance on end-of-day prices and recorded allocation times as proxies for actual allocation decisions was unreliable.
Woods rejected those arguments, ruling that the experts’ testimony concerns Leech’s conduct, not his mental state, and that the jury may draw inferences about intent from that conduct.
"The Government experts’ testimony is not impermissible because the jury may infer Mr. Leech's intent from their testimony about his conduct," Woods wrote. "Neither Professor Cohen nor Professor Kolm propose to offer any testimony that expressly states the inference."
The judge also denied the government’s motion to exclude testimony from defense experts, including a "blind allocation exercise" designed by Charles River Associates Vice President Aaron Dolgoff and NYU Professor Bruce Tuckman. In that exercise, Professor Tuckman allocated trades without knowledge of their first-day performance, resulting in a 56.8% match rate with Leech’s actual allocations.
The government argued the exercise was unreliable and misleading because it did not replicate Leech’s actual trading constraints, such as the ability to split trades 50/50. Woods found the exercise sufficiently reliable to meet the threshold of Federal Rule of Evidence 702.
"The design, execution, and analysis of the CRA Exercise reflect that both experts were employing the level of intellectual rigor that might be expected in their respective fields," Woods wrote.
While denying the motions, Woods cautioned both sides on the language used by experts. He ordered the parties to meet and confer on mutually agreeable language to ensure experts do not suggest inferences about Leech’s state of mind. The parties must file a letter on the status of those discussions within two weeks.
Woods also warned the defense against framing the government’s case as a "null hypothesis," a statistical term he said risks confusing the jury.
"Absent additional scientific justification for the use of that term in this context, the Court expects to sustain any properly raised objection should the defense elicit testimony that frames the Government's case in this way," Woods wrote.
The case is set for trial later this year. Leech is represented by attorneys from Morvillo Abramowitz Grand Iason & Anello P.C. and Cleary Gottlieb Steen & Hamilton LLP.