On February 3, 2011, the SEC charged AXA Rosenberg Group LLC (“ARG”), AXA Rosenberg Investment Management LLC (“ARIM”) and Barr Rosenberg Research Center LLC (“BRRC”) with securities fraud for concealing a significant error in the computer code of the quantitative investment model that they used to manage client assets.
ARIM, a registered investment adviser, used the quantitative investment model that was created by BRRC to manage client portfolios. The SEC found that a material error that disabled one of the model’s key components for managing risk was introduced into the model in April 2007. The error was not discovered until June 2009. Following the discovery of the error in June 2009, instead of disclosing and fixing the error immediately, according to the SEC, a senior ARG and BRRC official directed others to keep quiet about the error and declined to fix the error at that time. According to the SEC, the error was eventually fixed for all portfolios by November 2009, but clients were not notified of the error until April 15, 2010.
The SEC found that ARG, BRRC and ARIM made material misrepresentations and omissions about the error to ARIM's clients by failing to disclose the error and its impact on client performance, attributing the model's underperformance to market volatility rather than the error and misrepresenting the model's ability to control risks. In addition, the SEC found that BRRC did not have reasonable compliance procedures in place to ensure that the model would assess certain risk factors as intended, since BRRC did not have procedures in place to ensure coding functioned properly and in the manner represented to clients. ARG, BRRC and ARIM agreed to pay $217 million to harmed clients plus a $25 million penalty, and to hire an independent consultant with expertise in quantitative investment techniques to review disclosures and enhance the role of compliance personnel.