Barr M. Rosenberg on Thursday was barred from the investment industry for life and will pay $2.5 million in a settlement with the SEC over securities fraud charges for concealing a coding error in the investment model of AXA Rosenberg Group, ending the career of a pioneer in quantitative investing.
“This case is about individual accountability,” Marshall Sprung, assistant regional director of the SEC's Asset Management Unit in Los Angeles, said in an interview. ”This is a strong settlement with respect to a leader of a quantitative fund who was responsible for concealing a material error.”
The settlement announced Thursday follows a $25 million fine that was paid in February by AXA Rosenberg. The firm also returned $217 million to investors.
Mr. Rosenberg was fired in June 2010 after a review by AXA Rosenberg management found he had tried to cover up an error in the firm's quantitative investment model. He was also forced by the company to sell his remaining 21% share in AXA Rosenberg to French insurer AXA SA, which first purchased in 1998 a majority stake in the company Mr. Rosenberg founded, Rosenberg Institutional Equity Management.
Thursday's settlement with the SEC offers new details of the cover-up that originally stemmed from an April 2007 error in the company's risk model.
According to the SEC, the error was first noticed in June 2009 when an unidentified company employee who began work on a new version of the company's risk model found the old version was not giving the intended weight to common risk factors. The employee notified Mr. Rosenberg and advocated at a follow-up meeting with Mr. Rosenberg and his staff at the Barr Rosenberg Research Center that the error be fixed immediately. The center, which Mr. Rosenberg headed, developed and maintained the risk models.
“(Mr.) Rosenberg, however, disagreed and stated that the error should be corrected when the new risk model was released,” according to the SEC papers. “He directed BRRC employees with knowledge of the error to keep quiet about the discovery of the error and to not inform others about it.”
Mr. Rosenberg also failed to disclose the error to the AXA Rosenberg board, which had convened a series of meetings in mid- to late 2009 to discuss the risk model's underperformance, the settlement said.
The error was fixed for U.S. portfolios in September 2009 and other portfolios in late October and early November of that year; AXA Rosenberg Group CEO Stephane Prunet didn't know about the error until November 2009 when a BRRC employee felt compelled to inform him of it, the settlement says.
Jonathan Bass, an attorney for Mr. Rosenberg said his client “is distressed by the events that occurred at AXA Rosenberg. He never acted with any intention to cause harm to AXA Rosenberg clients or to gain any advantage or benefit for himself. He is relieved that the matter is now completed.”
In another statement, Jeremy Baskin, global CEO of AXA Rosenberg, stated, “This is a settlement between Barr Rosenberg and the SEC. AXA Rosenberg is not a party to the settlement. Barr has not been involved with the operations of AXA Rosenberg for quite some time, and our focus is on looking forward and delivering returns for our clients.”