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SEC Charges Quant Manager with Fraud
September 22, 2011
The co-founder of AXA Rosenberg, an institutional money manager, settled SEC charges he concealed a significant error in the computer code of the quantitative investment model he developed and provided to firm entities for use in managing client assets. Barr Rosenberg agreed to a $2.5 million penalty and a lifetime bar from the industry. The SEC previously charged the firm, AXA Rosenberg, and its affiliated investment advisers - which they agreed to settle by paying $217 million in restitution to harmed clients plus a $25 million penalty.
Allegations of SEC Findings. Barr Rosenberg supposedly learned of the error in June 2009 but directed others to keep quiet about it and not fix it immediately. During an October 2009 board meeting discussion about the model's performance, Rosenberg denied the existence of any significant errors. In late March 2010, however, AXA Rosenberg disclosed the error to SEC staff after being informed of an impending SEC examination. The error was not disclosed to clients until April 2010, which allegedly caused them $217 million in losses.
Rosenberg created the model, oversaw research projects to improve and enhance it, and exercised significant authority throughout the AXA Rosenberg organization. The material error in the model's computer code disabled one of its key components for managing risk and affected the model's ability to perform as expected. Clients raised concerns about this underperformance, and Rosenberg knew about and discussed these concerns with others at AXA Rosenberg.
But instead of disclosing and correcting the error immediately, Rosenberg directed others to conceal the error and declined to fix the error. Due to his misconduct, the SEC found that the AXA Rosenberg firm and its affiliated investment advisers misrepresented to clients that the model's underperformance was attributable to factors other than the error, and inaccurately stated that the model was controlling risk correctly. Rosenberg's instructions to delay fixing the error caused additional client losses.
Discovery of Error. According to the SEC's Administrative Proceeding, in late June 2009, a BRRC employee discovered an error in the Model’s computer code that had been introduced in 2007 and that effectively eliminated one of the key components in the Model for controlling for certain types of risk. Employee later discussed his finding in a meeting with Rosenberg, BRRC’s Director, and a small group of BRRC employees who were working under Rosenberg’s guidance on an enhancement to the Model.
Rosenberg directed the others to keep quiet about the error and to not inform others about it, and he directed that the error not be fixed at that time. Before and after discovery of the error, ARIM’s clients were expressing dissatisfaction with their portfolios’ underperformance. During the several months that Rosenberg and the BRRC employees concealed the error, ARG, ARIM, and BRRC failed to disclose the error, misrepresented the Model’s ability to control risk, and ascribed underperformance to market volatility and factors having nothing to do with the error. Due to Rosenberg’s directive, ARG’s Global CEO did not learn of the error as soon as he should have. The error was disclosed to the Global CEO in November 2009. The error impacted more than 600 client portfolios and caused approximately $217 million in losses. ARG disclosed the error to clients on 4/15/10.Players. This matter concerns an institutional money manager specialized in quantitative investment strategies that concealed from investors a material error in its computer code.
- AXA Rosenberg Group LLC ("ARG"), holding company of AXA Rosenberg Investment Management LLC ("ARIM"), the institutional money manager and SEC RIA that utilized the code.
- Barr Rosenberg Research Center LLC ("BRRC"), the SEC RIA that developed the code.
- Barr Rosenberg co-founded the firms now known as BRRC and ARG, and developed and programmed BRRC’s complex automated models and an "optimization” process (the "Model") that ARIM and affiliated offshore investment advisers ("Affiliated Advisers") used to create and manage client portfolios. During the relevant period, Rosenberg owned or controlled a 21% interest in ARG, and Rosenberg was ARG’s Chairman.
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