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January 27, 2014 at 08:59 AM
The Department of Labor and the Securities and Exchange Commission on Monday announced that they had reached a combined $21 million settlement with Legg Mason subsidiary Western Asset Management related to a purchase of prohibited securities that resulted in losses to the accounts of nearly 100 employee benefit plans and investment funds.
The SEC on Monday announced sanctions against the Pasadena, Calif.-based investment advisor for concealing investor losses that resulted from a coding error and engaging in cross trading that favored some clients over others.
The settlement and related SEC charges require Western Asset to restore a total of more than $17.4 million to employee benefit plans and other accounts and require the company to pay more than $3.6 million in penalties.
According to an SEC order instituting settled administrative proceedings, Western Asset serves as an investment manager primarily to institutional clients, many of which are ERISA plans.
“Western Asset breached its fiduciary duty by failing to disclose and promptly correct a coding error that caused the improper allocation of a restricted private investment to the accounts of nearly 100 ERISA clients,” the order states. “The private investment that was off-limits to ERISA plans had plummeted in value by the time the coding error was discovered, and Western Asset had an obligation to reimburse clients for such losses under the terms of its error correction policy. Instead, Western Asset failed to notify its ERISA clients until nearly two years later, long after the firm had liquidated the prohibited securities out of those client accounts.”
The DOL said in announcing the settlement that the investigation found that from Jan. 31, 2007, through June 12, 2009, Western Asset used funds from accounts covered by the Employee Retirement Income Security Act to purchase approximately $90 million of securities that were prohibited for purchase and ownership by such accounts.
“Specifically, Western Asset purchased Glen Meadow Pass-Through Trust Securities for 99 ERISA-covered accounts that were under its management. The investigation determined that the company’s own compliance system recognized that the terms of the securities prohibited their ownership by ERISA-covered entities. However, Western Asset overrode the system, allowing the accounts to improperly purchase and hold the securities in their portfolios,” according to DOL.
