SEC Settles Charges With AXA Rosenberg and TD Ameritrade

The Securities and Exchange Commission (SEC) on Thursday “charged three AXA Rosenberg entities with securities fraud for concealing a significant error in the computer code of the quantitative investment model that they use to manage client assets. The error caused $217 million in investor losses,” according to an SEC announcement. 

Separately on Thursday, the SEC charged TD Ameritrade Inc. for failing to reasonably supervise its representatives, some of whom misled customers when selling shares of the Reserve Yield Plus Fund.

The three companies, AXA Rosenberg Group LLC (ARG), AXA Rosenberg Investment Management LLC (ARIM), and Barr Rosenberg Research Center LLC (BRRC) will pay a $25 million penalty to the SEC, and an additional $217 million to investors. The firms use quantitative models to manage portfolios for clients. The SEC also “charged BRRC with failing to adopt and implement compliance policies and procedures to ensure that the model would work as intended.”

Bruce Karpati, co-chief, Asset Management Unit, SEC Division of Enforcement, told AdvisorOne that the $217 million that the three companies agreed to pay to investors will go to “those who were harmed.” The error, he said, affected “600 funds.”

The SEC found said in its announcement that “senior management at BRRC and ARG learned in June 2009 of a material error in the model's code that disabled one of the key components for managing risk. Instead of disclosing and fixing the error immediately, a senior ARG and BRRC official directed others to keep quiet about the error and declined to fix the error at that time.”

The SEC added in its release that, “the error, which was introduced into the model in April 2007, was eventually fixed for all portfolios. However, knowledge of the error was kept from ARG's Global CEO until November 2009. ARG then conducted an internal investigation and disclosed the error to SEC examination staff in late March 2010 after being informed of an impending SEC examination of ARIM and BRRC. ARG disclosed the error to clients on April 15.”

"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," Robert Khuzami, director of the SEC's Division of Enforcement, stated in the SEC release. "The secretive structure and lack of oversight of quantitative investment models, as this case demonstrates, cannot be used to conceal errors and betray investors."

AXA Rosenberg manages $30 billion as of December 2010, according to its corporate release. “A comprehensive, objective and detailed analysis of the coding error’s impact has been performed by Cornerstone Research, and its results have been incorporated into the SEC settlement. Compensation payments to adversely affected clients as calculated by Cornerstone will be made,” the AXA Rosenberg release stated.”

“We deeply regret that the coding error adversely impacted many of our clients,” Dominique Carrel-Billiard, chairman of the board of AXA Rosenberg stated in the company’s announcement. “The exhaustive review that we undertook of this matter reflects our commitment to regaining our client’s confidence and restoring trust.”

AXA Rosenberg did not respond by press time to AdvisorOne’s phone and emailed requests for comment; if they respond later, we will update this article.

TD Ameritrade Also Settles With SEC