AXA Rosenberg Co-founder Faces Fraud Charges Over Investment Model Errors

Jack Humphrey, Regulatory journalist
September 22, 2011 /

Choosing “concealment over candor,” the co-founder of a money manager has directed everybody in the firm to keep silent on a significant error which he discovered June 2009 in the computer code of the quantitative investment model that he developed.

Subsequently, and as a matter of course, the Securities and Exchange Commission has charged Barr Rosenberg, co-founder of institutional money manager AXA Rosenberg, with securities fraud. The investment model has been used by the firm in managing client assets.

The SEC’s investigation was conducted by Jason Lee and Marshall Sprung of the SEC’s Los Angeles Regional Office, and they were assisted by Alice Schulman of the SEC’s San Francisco Regional Office. Schulman, Arturo Hurtado, and Michael Tomars – securities compliance examiners in the San Francisco office – conducted the related AXA Rosenberg examination. Sprung is a member of the SEC’s Asset Management Unit.

According to the SEC’s order instituting administrative proceedings against Rosenberg, he denied the existence of any significant errors in the investment model during an October 2009 board meeting discussion about its performance.

In late March 2010, AXA Rosenberg disclosed the error to SEC examination staff for fear of being caught in an impending SEC examination. The error was not disclosed to clients until April 2010, causing them $217 million in losses.

Rosenberg 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 Rosenberg and its affiliated investment advisers, and they agreed to pay $217 million to harmed clients plus a $25 million penalty.

Bruce Karpati, Co-Chief of the Asset Management Unit in the SEC’s Division of Enforcement, said: “Investors in quant funds trust their advisers to develop, maintain and operate the quant models that drive a fund’s performance. Rosenberg betrayed investors when he failed to disclose the material coding error.”

Rosenberg created the investment 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.

The SEC’s order found that due to Rosenberg’s misconduct, AXA Rosenberg and its affiliated investment advisers misrepresented to clients that the investment 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.

In its order, the SEC found that Rosenberg willfully violated anti-fraud provisions of the Investment Advisers Act of 1940, Sections 206(1) and 206(2).

Without admitting or denying the SEC’s findings, Rosenberg consented to the entry of an SEC order that requires him to cease and desist from committing or causing any violations and any future violations of these provisions; orders him to pay the $2.5 million penalty; and bars him from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization and prohibits him from serving as an officer, director or employee of a mutual fund.


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