Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Thursday, February 3, 2011

SEC Charges AXA Rosenberg Entities for Concealing Error in Quantitative Investment Model

The SEC charged three AXA Rosenberg entities with securities fraud for concealing a significant error in the computer code of the quantitative investment model that they use to manage client assets. The error caused $217 million in investor losses.  AXA Rosenberg Group LLC (ARG), AXA Rosenberg Investment Management LLC (ARIM), and Barr Rosenberg Research Center LLC (BRRC) have agreed to settle the SEC's charges by paying $217 million to harmed clients plus a $25 million penalty, and hiring an independent consultant with expertise in quantitative investment techniques who will review disclosures and enhance the role of compliance personnel.

The SEC's order instituting administrative proceedings against the firms found that senior management at BRRC and ARG learned in June 2009 of a material error in the model's code that disabled one of the key components for managing risk. Instead of disclosing and fixing the error immediately, a senior ARG and BRRC official directed others to keep quiet about the error and declined to fix the error at that time.  The SEC additionally charged BRRC with failing to adopt and implement compliance policies and procedures to ensure that the model would work as intended.  According to the SEC's order, ARG is the holding company of BRRC and ARIM, which are Orinda, Calif.-based investment advisers registered with the SEC. BRRC developed and maintains the computer code for the quantitative investment model and ARIM uses the model to manage client portfolios.

The SEC found that the error, which was introduced into the model in April 2007, was eventually fixed for all portfolios. However, knowledge of the error was kept from ARG's Global CEO until November 2009. ARG then conducted an internal investigation and disclosed the error to SEC examination staff in late March 2010 after being informed of an impending SEC examination of ARIM and BRRC. ARG disclosed the error to clients on April 15.

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