Pasadena bond investment firm Western Asset Management Co. will pay $21 million to settle an investigation by the Securities and Exchange Commission and the Department of Labor over improper trades made between 2007 and 2009.

Under the settlement announced last week, Western Asset will pay $17.4 million to employee benefit plan funds that lost money because of the trades and an additional $3.6 million in penalties to the federal agencies. Western Asset is part of publicly traded Baltimore investment firm Legg Mason Inc.

Between 2007 and 2009, Western Asset improperly bought about $90 million in debt securities on behalf of private pension funds the firm managed. The federal Employee Retirement Income Security Act prohibits pension funds from investing in certain securities, including the type purchased by the firm.

But the trades went through because a computer program incorrectly identified the securities as being eligible for purchase by pension accounts, according to the settlement agreement. Officials at Western Asset noticed the problem in 2008 but didn’t notify investors at that time. The firm sold the securities in 2009 at a significant loss.

Federal investigators also found that Western Asset engaged in cross-trading, the practice of selling securities to a broker then buying the same security back, with a markup, on behalf of a different client. Such transactions are prohibited by some pension funds.

What’s more, some of the cross-trading was done with accounts Western Asset was managing for the Public-Private Investment Program, part of the Treasury’s Troubled Asset Relief Program, according to a statement by TARP’s special inspector general. The firm was prohibited from cross-trades involving that program.

In a statement, Western Asset said it was not admitting wrongdoing but was glad to have the matter settled.

“These resolutions represent negotiated settlements of the outstanding matters in which Western neither admits nor denies the charges,” the statement read. “Western chose to settle the matters to avoid the uncertainty, expense and distraction of litigation.”

The statement also noted that most of the settlement payments will be covered by insurance.

Mary Athridge, a spokeswoman for Legg Mason, said that Western Asset has amended its trading processes in the past few years and that the firm now has more formal processes for reviewing potential investments.

Longer Name

Westwood business management firm Nigro Karlin Segal & Feldstein has added yet another name to its door, that of partner David Bolno. The firm is now Nigro Karlin Segal Feldstein & Bolno.

Prev

For reprint and licensing requests for this article, CLICK HERE.