SEC-Registered Investment Adviser Agrees to $21 Million Penalty for Illegal Cross Trades and a Coding Error
Written by: Jessica M. Brown
The Securities and Exchange Commission (“SEC”) and the United States Department of Labor (“DOL”) announced sanctions today against Western Asset Management Company (“Western Asset”), a subsidiary of Legg Mason. Western Asset is an SEC-registered investment adviser and reported $442.7 billion in assets under management as of September 30, 2013.
The SEC found Western Asset breached its fiduciary duty to certain ERISA clients when it failed to efficiently correct a coding error that caused losses to over 100 ERISA clients, and did not disclose the error for over two years. The coding error caused an off-limit private investment to be allocated to the ERISA accounts, and such investment declined significantly in value before the error was discovered. Western Asset concealed the error rather than reimburse the clients as it was obligated to do under its error correction policy. In addition to other sanctions for the disclosure violations, Western Asset must distribute approximately $10 million to the harmed ERISA clients. Further, Western Asset must pay a $1 million civil penalty in the SEC settlement and an additional $1 million penalty in the DOL settlement.
Western Asset was also found to have engaged in prohibited cross trades during the financial crisis. Instead of crossing the securities at the average price between the bid and the ask price, Western Asset crossed the securities at the bid price. As a result, the full benefit of the market savings was allocated to the buying clients and the selling clients lost out on approximately $6.2 million in savings. Pursuant to a separate order settling the cross trade charges, Western Asset must distribute approximately $7.44 million to the clients who were harmed by the illegal cross trading, pay a $1 million penalty in the SEC settlement, and a $607,717 penalty in the DOL settlement.