SEC Sues ARG Entities for Investors’ Losses Caused by Computer Error

Jack Humphrey, Regulatory journalist
February 03, 2011 /

A significant computer error which quantitative investment player AXA Rosenberg Group (ARG) failed to disclose to investors has cost $217 million in losses to clients, bringing ARG entities responsible for the debacle under scrutiny of the Securities and Exchange Commission.

AXA Rosenberg Group LLC (ARG), AXA Rosenberg Investment Management LLC (ARIM), and Barr Rosenberg Research Center LLC (BRRC) conceded to SEC’s settlement by paying $217 million to investors affected by the computer error, with financial penalty of $25 million. The SEC also orders ARG to hire an independent consultant to review its disclosure policies and recommend better compliance program for its staff and propose procedures for the disclosure and reporting processes for its quantitative investment model.

The SEC claimed that the senior management at BRRC and ARG found a computer error in the code of its quantitative investment model in June 2009 which broke down one of the key components for risk management. But ARG entities did not disclose the glitch to investors, in addition to its failure to fix the glitch.

ARG was also charged with failing to implement compliance functions among its staff to ensure that the model works properly to manage risk.

ARG serves as a holding company of two California-based investment advisers, BRRC, which developed the quantitative investment model computer code in 2007, and ARIM, which manages client portfolios using the model.

It was until November 2009 that the computer error has been hidden from the knowledge of ARG’s global CEO, who then conducted an internal investigation. In March 2010, ARG reported the problem to the SEC and to the clients in April 15.

Furthermore, the SEC alleged that ARG, BRRC, and ARIM did not tell the investors about the impact of the substandard model to the performance of clients. The SEC attributed the “underpeformance” to market volatility rather than the computer error.

 

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