MANHATTAN (LN) — U.S. District Judge Gregory H. Woods denied both the government’s and the defense’s Daubert motions on Thursday, ruling that the proposed expert testimony regarding S. Kenneth Leech, II’s allocation of Treasury futures and options was reliable and admissible under the Federal Rules of Evidence.
The government alleges that Leech, a former Chief Investment Officer at Western Asset Management Company, engaged in a fraudulent “cherry-picking” scheme. The indictment claims Leech executed trades, waited to see how they performed, and then allocated well-performing trades to favored accounts while dumping underperforming trades into disfavored portfolios.
Woods held that the government’s experts, Harvard’s Professor Lauren Cohen and NYU’s Professor Petter Kolm, used sufficiently reliable methods to calculate first-day and pre-allocation returns. The defense argued the methodology was flawed because it relied on end-of-day prices and recorded allocation times rather than the exact moment Leech made his decisions.
Woods rejected that argument, noting that the defense did not prove the assumptions were “unrealistic and contradictory” or that they suggested bad faith. The judge wrote that challenges to the factual basis for an expert’s application of an otherwise reliable methodology are “quintessential jury issues” to be resolved through cross-examination.
The court also upheld the defense’s “Charles River Associates Exercise,” a blind allocation test designed by Professor Bruce Tuckman and Mr. Aaron Dolgoff. The exercise tasked Tuckman with allocating Leech’s trades without knowing their first-day performance. Tuckman’s allocations matched Leech’s 56.8 percent of the time, a result the defense argues shows Leech’s decisions could be explained by standard portfolio management rather than fraud.
Woods ruled the exercise was sufficiently reliable and relevant, noting that while the exercise did not fully replicate Leech’s circumstances, that shortcoming goes to the probative value of the evidence, not its admissibility.
The judge did, however, caution both sides to carefully frame their testimony to avoid crossing the line into impermissible opinions on Leech’s state of mind. Woods ordered the parties to meet and confer to agree on language for the experts to use, specifically targeting the government’s use of the word “using” and the defense’s use of the term “proxy” to describe Tuckman’s methodology.
Leech faces five counts, including investment adviser fraud, securities fraud, and making false statements to the SEC.
Woods is a George W. Bush appointee.