AXA Rosenberg Group and two of its subsidiaries agreed to pay $242 million in compensation and fines in a settlement with the SEC over charges that the money manager concealed a coding error in its quantitative investment model.
AXA Rosenberg Group and its subsidiaries AXA Rosenberg Investment Management and Barr Rosenberg Research Center agreed to pay a total $217 million to clients who suffered losses because of the coding error plus a $25 million penalty, according to an SEC news release.
The settlement follows SEC charges of securities fraud against AXA Rosenberg and the subsidiaries. The agency also said AXA Rosenberg agreed to hire an independent consultant with expertise in quantitative investment techniques who will review disclosures and enhance the role of compliance personnel.
“Quantitative managers must not sacrifice compliance and full disclosure for the sake of keeping their models secret from investors and out of touch from regulators,” Marshall S. Sprung, assistant regional director of the SEC’s asset management unit for its Los Angeles office, said in a phone interview.
The SEC settlement says 608 of AXA Rosenberg’s 1,421 clients were affected by the coding error. The error began in April 2007 and remained uncorrected until November 2009.
In a separate news release, Dominique Carrel-Billiard, AXA Rosenberg Group chairman, apologized for the coding error. He said the $217 million compensation amount was reached by Cornerstone Research, an economic and financial research firm, which was hired by AXA Rosenberg to help determine damages.
“We deeply regret that the coding error adversely impacted many of our clients,” Mr. Carrel-Billiard said in the release. “The exhaustive review that we undertook of this matter reflects our commitment to regaining our client’s confidence and restoring trust.”
AXA Rosenberg’s own internal review of the situation last year led to the dismissal of Barr Rosenberg, AXA Rosenberg chairman, and Thomas Mead, director of the Barr Rosenberg Research Center. The internal review found that both had failed to disclose the error to the company’s senior management.
AXA Rosenberg Group spokesman John Christiansen said the company would not comment beyond the release.
The settlement details the role of a senior AXA Rosenberg Group official, identified by sources as Mr. Rosenberg, in covering up the coding error. It says the senior company official was first told of the coding error by programmers in June 2009.
The senior official told the employee and others who knew to “keep quiet” about the discovery, the settlement says.
It says the senior official and other unidentified AXA Rosenberg Group employees violated the company’s own escalation policy requiring that the coding error be reported to senior management. Clients who had been complaining of underperformance were told that it was due to market volatility, rather than the error, because of the lack of disclosure, the settlement says.
The senior official continued to insist at a company board meeting in October 2009, during a discussion of the model’s underperformance, that he was not aware of any significant mistakes in the model, the settlement says.
The settlement says that Agustin Sevilla, AXA Rosenberg’s global chief investment officer at the time, was told of the coding error in late November 2009, when an unidentified AXA Rosenberg Group employee decided to break the silence over the error. The company began its own investigation a month later.
The SEC news release says AXA Rosenberg officials disclosed the error to SEC officials in late March 2010 after being informed of an impending SEC examination of AXA Rosenberg Investment Management and Barr Rosenberg Research Center.
Mr. Rosenberg did not return calls seeking comment.