SEC Charges Quant Manager with Fraud – AXA Rosenberg

September 22, 2011
U.S. Securities and Exchange Commission – (National)

The U.S. Securities and Exchange Commission (SEC)September 22 charged the co-founder of institutional money manager AXA Rosenberg with securities fraud for concealing a significant error in the computer code of thequantitative investment model he developed and provided to the firm’s entities for use in managing client assets. According to the SEC’s order instituting administrative proceedings, the money manager learned of the error in June 2009, but directed othersto keep quiet about it and not fix it immediately. He denied the existence of anysignificant errors during an October 2009 board meeting discussion about performance. AXA disclosed the error to SEC examination staff in March 2010 after being informed of an impending SEC examination. The error was not disclosed to clients until April2010, causing them $217 million in losses. The money manager has agreed to settle the SEC’s charges by paying a $2.5 million penalty, and consenting to a lifetime securities industry bar. The SEC previously charged AXA and its affiliated investment advisers, and they agreed to pay $217 million to harmed clients plus a $25 million penalty.

According to the SEC’s order, the manager created the model, oversaw research projects to improve and enhance it, and exercised significant authority. The material error in the computer code disabled a key component for managing risk, and affected the model’s ability to perform. The SEC’s order found that due to the man’s misconduct, AXA and its affiliated investment advisers misrepresented to clients that the model’s underperformance was attributable to factors other than the error, and inaccurately stated the model was controlling risk correctly. His instructions to delayfixing the error caused additional client losses. In its order, the SEC found the man willfully violated anti-fraud provisions of the Investment Advisers Act of 1940, Sections 206(1) and 206(2).


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