Legg Mason: The Broker Got Paid for a Deal He Did Not Build

In the Legg Mason FCPA case, the company agreed to pay $34,502,494 to settle Securities and Exchange Commission allegations that it failed to control intermediaries used to win Libyan investments. According to the agency, its former asset-management subsidiary Permal earned fees while Société Générale paid the broker. The SEC’s account connects the investment proposals, commission payments and employees’ conversations, including a deal the broker neither negotiated nor structured but still got paid for.

The SEC’s August 27, 2018 order concerned Legg Mason’s internal accounting controls over introducing brokers and other intermediaries. It alleged that two Permal employees knew the intermediary was paying Libyan officials and agreed to keep using him.

How Libyan Investments Became Permal Fees

Permal’s business was managing assets, and the bank’s structured notes brought assets into Permal-managed funds. The SEC described Legg Mason as a Baltimore investment-management firm whose financial statements included Permal’s results and whose arrangement with Permal shared net revenue. Permal’s employees were also subject to Legg Mason’s code of conduct.

Around 2004, as Libya emerged from international economic sanctions, its state-owned financial institutions sought places to invest substantial assets. The SEC described financial firms competing aggressively for access to that money. Permal explored partnerships with introducing brokers and other financial institutions to reach those customers.

The SEC described how the firms divided the work. Société Générale received the Libyan institutions’ money and issued structured notes, debt securities linked to investment funds. Under its agreement with Permal, some of the invested assets went into funds Permal managed. Permal counted those assets under management and earned fees on them.

The SEC tied Permal’s fees to seven structured notes with a total value of approximately $950 million. Some management fees continued until 2012. That is the commercial attraction in investment-management bribery: winning the allocation can bring fee income long after the introduction.

In its account of Société Générale’s criminal admissions, the Justice Department described approximately $523 million in profits from the bank’s broader Libyan investment business. The bank paid the intermediary over $90 million, portions of which went to high-level Libyan officials.

An Introducing Broker With Officials to Deliver

The intermediary offered access to the people controlling Libya’s public investment capital. According to the SEC, he arrived at an early meeting with Permal accompanied by several Libyan government officials. Permal understood that those connections would make him an effective introducing broker.

The SEC alleged that Société Générale paid commissions to a Panama company the intermediary controlled, ranging from one and a half to three percent of each investment’s face value. According to the agency, the intermediary used those funds to pay high-level Libyan officials to secure investments. Permal and Société Générale had jointly decided that the bank would make the payments, and Permal did not pay the intermediary directly under that arrangement.

By at least 2006, according to the order, two Permal employees knew that the intermediary was paying bribes. Employees at both firms discussed his payments and used the word “cooked” for bringing an official under his control. In a recorded call to a bank employee, the intermediary put it this way:

The SEC connected that language to the business being sought. Soon afterward, a Permal employee sent the official a proposal for a bank-issued note linked to a Permal-managed fund, and a bank employee emailed a senior Permal employee about confidence that Permal would be included in upcoming deals. The sales proposal and the private conversation told different parts of the same story.

The Commission Followed the Notes

According to the SEC, in March 2007 two Libyan institutions jointly invested $500 million in three structured notes issued by a Société Générale subsidiary. Two of the notes were linked to funds that included Permal-managed funds, and the bank then paid the intermediary $15 million through the Panama company’s account.

The SEC described further notes sold that summer, again linked to Permal-managed funds and followed by intermediary commissions. The June term sheet and deal documents carried Permal’s logo and information, putting the manager visibly inside a transaction whose commission the bank handled.

A Commission for a Deal Permal Pitched Itself

The sharpest mismatch concerned an investment Permal had pursued directly. According to the SEC, Permal initially sought an investment into its own managed fund, but the customer ultimately bought a Société Générale structured note linked to Permal-managed funds. The November 2007 purchase was worth $300 million.

The SEC alleged that Permal employees had originally pitched the deal without the intermediary’s assistance and that he played no role in negotiating or structuring it. Yet the term sheet, prepared by the bank with Permal’s logo on its cover, credited the Panama company with collaborating on the transaction and receiving compensation for its services. It identified Permal as investment adviser to the fund behind the note.

The bank then prepared a $9 million invoice for the intermediary to send back to the bank, according to the order. It paid that amount into the Panama company’s account at Société Générale in Zurich. We see the absurdity in that paperwork: the bank paying for the supposed service wrote the service provider’s bill, while the deal team had done the work without him.

An investment professional could recognize that gap from the negotiations themselves. A finance employee handling the commission might see the invoice’s origin or payment instructions instead. Connecting those views tests the service described on paper against the work people actually saw.

When the Customer Asked About Agents

The customer’s proposed disclosure requirement reached the very relationship the firms had kept out of view. The SEC said Société Générale learned in April 2008 that the Libyan institution would require financial firms seeking its investments to disclose their use of intermediaries or third parties. On a recorded call the next day, a bank employee called the requirement a “Libyan bomb,” and the Permal employee replied:

That reaction matters because the customer was asking who stood between it and the firms seeking its money. The SEC also alleged that at least one Permal employee knew bank employees were taking steps to conceal the intermediary’s payments from the Libyan institutions. The disclosure question threatened to connect the customer-facing investment documents with the commission arrangement.

The sales effort continued into travel and entertainment for the official. According to the SEC, Permal provided a negotiations course, luxury hotel accommodation and entertainment in Boston in May 2008. The official and a Permal employee then traveled to New York, where a bank employee provided upscale accommodation, meals, nightlife and luxury gifts. The trip came with a pitch for approximately $4 billion in additional investment.

The customer-disclosure problem also appeared in Och-Ziff. In its separate SEC order, the agency alleged that the investment manager removed a requirement for proof that its Libyan agent had disclosed his role and fee to the Libyan Investment Authority. It accepted the agent’s representation instead. In both accounts, the customer’s knowledge of the intermediary was a question the investment manager could have insisted on answering.

The Controls Behind the SEC Settlement

The SEC’s findings against Legg Mason concerned internal accounting controls over introducing brokers and other intermediaries. The agency described controls that were minimal and deficient, with inadequate diligence and oversight of agents and business partners. It said Legg Mason had failed to take adequate steps to identify or reduce bribery risks in using middlemen such as the Libyan intermediary.

That finding reaches the arrangement the business had chosen. The bank made the commission payments, while Permal recognized the assets and earned management fees. Review of the intermediary therefore belonged alongside the investment decision, the service description and the employees’ knowledge of the official relationship.

The order required Legg Mason to return $27,594,729 in gains, against approximately $31.6 million in net revenues the SEC attributed to Permal’s transactions. The agency also credited Legg Mason’s cooperation and changes that included replacing involved employees and strengthening controls.

What an Investment Insider Can Connect

The useful evidence in an investment case connects the official’s decision to the commission, the actual work and the money the manager earned. Here, the SEC described term sheets carrying Permal’s logo, employee emails, recorded calls, an invoice prepared by the paying bank and a transfer to the intermediary’s company. An insider’s understanding of who brought in the customer and who negotiated the deal gives those documents meaning.

A 2022 review in the Journal of Forensic and Investigative Accounting, How to Avoid Inadvertently Violating the Foreign Corrupt Business Practices Act Abroad, recommends periodic reviews that can uncover unusual credit terms and payment installments to holding organizations. That observation adds a useful payment question to the service question in this case: how did the way the intermediary was paid fit what he was supposedly hired to do?

The person authorizing a payment, the company receiving it and the official benefiting from it can sit in different organizations and countries. In Legg Mason’s case, the SEC account tied those relationships to a U.S. investment manager earning fees. Your knowledge of the deal, the commission or the warning inside the business may supply the connection another employee never saw.

An eligible whistleblower can receive an SEC reward of 10% to 30% of qualifying sanctions the government collects. Our whistleblower experts can assess how your knowledge of the investment and commission fits an award case.

You Know Who Earned the Commission

If you saw a broker paid for work the investment team did, or an agent’s role concealed from a public investor, tell our whistleblower experts about the transaction. We work beside you to build your strongest case and bring in Foreign Corrupt Practices Act whistleblower lawyers who understand investment-management cases. Speak to one of our Whistleblower Experts about who really earned that commission.