The SEC, on September 22, 2011, charged Ben M. Rosenberg, a co-founder of California-based institutional money manager AXA Rosenberg, with fraud for concealing a significant error in the computer code of the quantitative investment model that he developed and provided to his firm and related entities for managing client assets.
According to the SEC, Mr. Rosenberg knew of the error in June 2009 but directed others in the firm to not reveal or correct the error. Mr. Rosenberg eventually disclosed the error to the SEC in March 2010 just prior to the SEC conducting an examination of AXA Rosenberg. Clients were informed by Mr. Rosenberg of the error in April 2010. According to the SEC, the failure to disclose the error resulted in $217 million in losses in 600 client accounts managed by AKA Rosenberg and related entities.
Mr. Rosenberg has agreed to settle the SEC's charges by paying a $2.5 million penalty and agreeing to a lifetime bar from the securities industry. The SEC had previously charged AXA Rosenberg and its affiliated investment advisers, who agreed to pay $217 million to clients harmed from the concealment of the error and a $25 million penalty.
The quantitative model that Mr. Rosenberg created and used to manage client assets included a material error, as early as June 2009, in the model's computer code. The error served to disable one of the model's key components for managing risk and affected the model's ability to perform as expected. Although the error was brought to Mr. Rosenberg's attention by staff in June 2009, he directed staff and others to conceal the error and declined to fix it. Instead, in response to client concern about the effectiveness of the model, Mr. Rosenberg informed clients that the model's underperformance was due to other factors and that the model was controlling risk effectively, although he knew that was not the case. To compound the problem, Mr. Rosenberg did not act to fix the error although he had the capacity to do so.
The SEC's complaint cited violations by Mr. Rosenberg of willfully violating the anti-fraud provisions of the Investment Advisers Act of 1940, under Sections 206(1) and 206(2). For more complete information about this matter, see SEC Release 2011-189 and IA-3285.