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

“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.”