SEC charges Western Asset Management for mortgage-related trades

Firm slammed with $21M settlement

In the midst of the financial crisis, investment advisory firm Western Asset Management, a subsidiary of Legg Mason, engaged in the cross-selling of mortgage-backed securities, the Securities and Exchange Commission and the Special Inspector General for the Troubled Asset Relief Program claim in a report released Wednesday.

The company also settled a matter with the Department of Labor.

The California firm’s actions led to an investigation that resulted in the SEC leveraging charges against Western Asset this week.

SIGTARP, which launched the initial investigation, released a statement saying Western Asset will pay $21 million to settle the SEC case after a long investigation that dates back to the financial crisis.

The issue apparently popped up as the housing market crashed, leaving investment advisor Western Asset in a situation where it needed to sell MBS at a time when the value of the assets were tanking.

The SEC and the Office of the Special Inspector General for the Troubled Asset Relief Program started examining the company’s practices, which allegedly involved the moving of one MBS security from one client to another, without declaring the transaction to the market.

The end result of such a move is that both clients benefit by avoiding certain costs, SIGTARP said. Yet, this type of cross-selling creates risk for clients since the firm ends up operating on behalf of the buyer and seller, creating conflict.

SIGTARP explained this conflict saying, "Instead of selling the securities at prices that Western Asset believed did not represent their long-term value, it arranged for certain broker-dealers to purchase securities from the Western Asset selling clients and sell the same security back to different Western Asset clients with greater risk tolerance in prearranged sale-and-repurchase cross trades."

SIGTARP notes the firm cross-sold the securities at bid price rather than using the average between the bid and asking price. Doing this ended up “improperly” allocating the benefit of the market savings on the trades to buying clients while denying selling clients about $6.2 million in savings, SIGTARP alleged.

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