SEC Reminds Investment Managers: Own Up to Mistakes or Owe Us, Too

Last week, the SEC charged AXA Rosenberg Group LLC (ARG), AXA Rosenberg Investment Management LLC (ARIM), and Barr Rosenberg Research Center LLC (BRRC) with securities fraud.  The entities apparently concealed "a significant error in the computer code of the quantitative investment model that they use to manage client assets."  The entities settled the charges by paying $217 million to the clients harmed by the error, along with a $25 million penalty to the SEC. The companies also agreed to hire an independent consultant to help the company with future compliance and disclosures. 

According to the SEC Order (pdf here),  

In late June 2009, a BRRC employee discovered an error in the Model’s computer code that was introduced in 2007 and effectively eliminated one of the key components in the Model for managing risk. This employee later discussed his finding in a meeting with senior ARG and BRRC officials and employees.  A senior ARG and BRRC official (“Senior Official”) directed them 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. 

At least some members of the company seemed to understand the proper way to proceed; another employee finally told the CEO of ARG about the error in November 2009.  ARG then "disclosed the error to Commission examination staff after Commission examination staff informed ARG of an impending examination of ARIM and BRRC" on late March of 2010. Clients got their notice of the error on tax day 2010.

So what did the companies "gain" by waiting?  Well, they got to pay a $25 million penalty in addition to reimbursing clients for the harm.  They have also earned distrust from both their primary regulators AND their customers.  Maybe the company thought it was worth the risk to see if they could avoid both the fine and reimbursing their customers, but that's not how I'd run my company.  In my view, there a much better ways to respond to mistakes, even big ones.  Like this.

--JPF