AXA Rosenberg Settles With SEC, Paying $242 Million for Hiding Computer Glitch

The US computer-based investment branch of the French AXA group will pay $242 million in compensation and fines for allegedly concealing a major program glitch.

(February 3, 2011) — Three AXA Rosenberg entities have settled charges brought by the US Securities and Exchange Commission (SEC), agreeing to pay more than $240 million.

The SEC had accused the money manager of concealing a major computer error that led its investment managers to make erroneous investment decisions in 2008 and 2009, allegedly causing a $217 million loss. In compensation, the AXA Rosenberg entities agreed to pay back the $217 million in losses plus a $25 million penalty.

“To protect trade secrets, quantitative investment managers often isolate their complex computer models from the firm’s compliance and risk management functions and leave oversight to a few sophisticated programmers,” said Robert Khuzami, Director of the SEC’s Division of Enforcement, in a statement. “The secretive structure and lack of oversight of quantitative investment models, as this case demonstrates, cannot be used to conceal errors and betray investors.”

According to the US regulator, the error was introduced into the model in April 2007 and was eventually fixed for all portfolios. However, the SEC asserted that the AXA Rosenberg Group LLC (ARG) concealed their knowledge of the error from the firm’s Global CEO until November 2009. Subsequently, after being informed of an impending SEC examination, the firm conducted an internal investigation and disclosed the error to the SEC in late March 2010, finally disclosing the error to clients on April 15.

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“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,” wrote Bruce Karpati, Co-Chief of the Asset Management Unit in the SEC’s Division of Enforcement in a news release on the SEC’s website.

In response to the settlement, AXA Rosenberg announced that the review process initiated by its Board of Directors regarding the coding error is fully complete. “We deeply regret that the coding error adversely impacted many of our clients,” said Dominique Carrel- Billiard, Chairman of the Board of AXA Rosenberg in a statement on the firm’s website. “The exhaustive review that we undertook of this matter reflects our commitment to regaining our client’s confidence and restoring trust.”

Among the changes are new senior hires, including the appointment of Jeremy Baskin as Global CEO. “Today marks the beginning of a new era for AXA Rosenberg,” said Baskin. “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.”

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

In a 2,000-word diatribe, PIMCO's Bill Gross has said that Central bankers compare unfavorably to the devil and that money managers have failed to properly allocate capital.

(February 3, 2011) — Bond manager Bill Gross, the managing director of the Pacific Investment Management Co. (PIMCO), has criticized America’s culture of money and greed in his latest commentary, asserting that the US needs new priorities.

The report — titled “Devil’s Bargain” — places blame on money managers for failing to make smart decisions in regards to asset allocation. Gross further criticizes financial innovation, such as securitization, urging investors to analyze other yields and assets. “Fifty years ago, the highest paid and most prestigious professions were that of a doctor or a 707 airline pilot who flew the “golden” route from Los Angeles to Honolulu,” he wrote. “Today the yellow brick road begins on Wall Street or the City…the money is made from securitizing things instead of booting and rebuilding America. The tallest buildings in almost every major city are banks, with tens of thousands of people shuffling and trading paper for a living.”

Additionally, he warns that the US Federal Reserve’s policy of keeping real interest rates low for long periods will inflate the price of other asset classes, and thus warns that holders of US Treasury debt will earn negative returns.

Gross, who manages the world’s largest bond fund, the $250 billion PIMCO Total Return fund, wrote: “As a profession we have failed miserably at our primary function – the efficient and productive allocation of capital: The S&L debacle of the early 1980s, the Asian crisis, LTCM, dotcoms, subprimes, Lehman and the resurrection, instead of the reformation, of Wall Street, are major sins of the modern era of money. Hang your heads, moneychangers.”

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Earlier, in a memo to Davos participants, PIMCO’s Mohamed A. El-Erian warned that policymakers must navigate a multispeed world as short-term policy priorities conflict with longer-term priorities, noting that policymakers would benefit from a more balanced analysis of the risks and opportunities facing today’s global economy. “International forums such as Davos can help policy makers overcome these problems,” he wrote in a Bloomberg article. “There is much to be gained by focusing on the realities of our multispeed world and policy inconsistencies…Failing that, too many policy makers will remain hostage to active inertia while others will be paralyzed into inaction.”

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742