AXA Rosenberg said it agreed to pay $217 million to cover investor losses as well as a $25 million civil penalty, in a settlement with the Securities and Exchange Commission regarding a coding error with its risk model, the California investment management firm said Thursday.
The SEC charged three of the firm’s entities--AXA Rosenberg Group LLC (ARG), AXA Rosenberg Investment Management LLC (ARIM), and Barr Rosenberg Research Center LLC(BRRC)--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 agency announced in a statement.
AXA Rosenberg revealed the error in April 2010.
“Quant managers must be fully forthcoming about the risks of their model-driven strategies, especially when errors occur and the models don't work as predicted,” Bruce Karpati, co-chief of the Asset Management Unit in the SEC's Division of Enforcement, said.
The SEC said senior management at BRRC and ARG in June 2009 learned of a "material error" in the model's code that disabled a "key component" 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 said.
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,'' the SEC said.
AXA Rosenberg announced in July 2010 that chairman Barr Rosenberg resigned following an investigation into errors in the company's data systems.
Additionally, Cornerstone Research has completed a review of the coding error’s impact, the results of which have been incorporated into the SEC settlement, a Feb. 3 statement said.
The aggregate compensation amount is roughly $217 million. AXA has also “agreed to pay a civil penalty of $25 million, and to certain other terms related to ongoing internal oversight, recordkeeping, periodic policy reviews and the retention of an independent compliance consultant,” the statement noted.
“We deeply regret that the coding error adversely impacted many of our clients,” Dominque Carrel-Billiard, chairman of the board, said. “The exhaustive review that we undertook of this matter reflects our commitment to regaining our client’s confidence and restoring trust.”
The discovery of AXA Rosenberg’s coding error prompted several of its institutional clients to part ways with the firm.
In May 2010, the School Employees’ Retirement System of Ohio (SERS) removed the manager from a roughly $25 million small-cap mandate.
Similarly, the Los Angeles Fire and Police Pensions (LAFPP), the City of Fresno Retirement System, the Florida State Board of Administration and the Montana Board of Investmentsall terminated the manager for the error.
The firm has since taken several actions to “reinforce and further enhance its investment process,” it said in the Feb. 3 statement.
Among the changes are several new senior hires and the appointment of Jeremy Baskin as Global CEO at the global equity firm.
“Today marks the beginning of a new era for AXA Rosenberg,” Baskin said. “Having made many changes to our organizational and ownership structure, our management team and how we do business, we look forward to the opportunity to again demonstrate our unique value in helping our clients meet their investment goals in the future.”
AXA Rosenberg is an investment management firm specializing in equities, based in Orinda, Calif. As of December 2010, the firm had $31 billion under management.
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