Axa Rosenberg

The Securities and Exchange Commission is seeking district court approval of its proposed securities fraud settlement with two ex-Bear Stearns & Co. portfolio managers. The SEC presented its second plea to the U.S. District Court for the Eastern District of New York earlier this month.

In a letter to the court, the SEC cited the Second Circuit Appeals Court’s decision earlier this month to stay a district court judge’s ruling turning down the Commission’s proposed $285M settlement with Citigroup Global Markets Inc. It said that the order in that matter “supports approval and entry” of this pending consent judgment.

If the settlement is approved, former Bear Stearns portfolio managers Matthew and Tannin and Ralph Cioffi would settle SEC charges accusing them of misleading bank counterparties and investors about the financial condition of two hedge funds that failed because of subprime mortgage-backed securities in 2007. Per the terms of the proposed settlement, Tannin would pay $200,000 in disgorgement plus a $50,000 fine and Cioffi would pay $700,000 in disgorgement and a $100,000 fine.

This is the second attempt by the SEC and the defendants to the court for settlement approval after District Court Judge Frederic Block cited concerns made by Judge Rakoff, who is the one who threw out the proposed $285M settlement in the SEC-Citigroup case and ordered both parties to trial. The Second Circuit has since stayed those proceedings. (In the securities case between the SEC and Citigroup, the regulator had accused the financial firm of misrepresenting its involvement in a $1 billion collateralized debt obligation that the latter and structured and marketed five years ago.)

In other SEC news, the Commission has honored its commitment to providing greater transparency when it comes to cooperation credit by notifying the public that it credited an ex-AXA Rosenberg senior executive for his substantial help in an enforcement action against the quantitative investment firm. AXA Rosenberg is accused of concealing a material error in the computer code of the model it used to manage client assets.

The SEC said it would not take action against the former executive not just because of the help he provided, but also because the alleged misconduct in question was one that mattered so much. Fortunately, the SEC was able to give clients back the $217 million they lost, as well is impose penalties of $27.5 million. This was the Commissions first case over mistakes in a quantitative investment model.

Meantime, the International Organization of Securities Commissions’ Technical Committee says it has updated the data categories for information it plans to collect in a global survey of hedge funds that will take place later this year. Modified reporting categories include general information about firms, funds, and advisors, geographical focus, market and product exposure for strategy assets, leverage and risk, trading and clearing.

According to IOSCO, responses to the survey will bring together an array of hedge fund information that regulators can look at to determine systemic risk. The committee believes that having securities regulators regularly monitor hedge funds for systemic risk indicators/measures will be beneficial and provide necessary insight into possible issues hedge funds might create for the global financial system. This will be IOSCO’s second survey on hedge funds.

SEC Credits Former Axa Rosenberg Executive for Substantial Cooperation during Investigation, SEC, March 19, 2012

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Janus Avoids Responsibility to Mutual Fund Shareholders for Alleged Role in Widespread Market Timing Scandal, Stockbroker Fraud Blog, June 11, 2007

AXA Rosenberg Investment Management LLC (ARIM), AXA Rosenberg Group LLC (ARG), and Barr Rosenberg Research Center LLC (BRRC) have agreed to pay over $240 million to settle administrative securities fraud charges that they hid an important error in the computer code of the quantitative investment model used for managing client assets. The Securities and Exchange Commission says the error resulted in investor losses worth $217 million. As part of the settlement, the three Axa Rosenberg entities will repay the investors who sustained financial losses, as well as a $25 million penalty.

The SEC says that the institutional money manager’s concealment of “material error in its computer code” from investors was a violation of federal securities laws. The commission also claims that the three entities made material misrepresentations, such as failing to disclose the error or its effect and did not properly represent “the model’s ability to control risks.”

Per the charges, the error, which was discovered by ARG and BRRC senior managers in June 2009, disabled a key risk-management component. Instead of fixing the problem right away, senior management told others not to reveal the error, which they did not remedy at the time.

The SEC says that quantitative investment managers have been known to “isolate their complex computer models from the firm’s compliance and risk management function” in an attempt to protect trade secrets.” The SEC also claims that BRRC failed to implement and adopt compliance procedures and policies to make sure the model would work as intended. Although the error was eventually remedied, ARG’s Global CEO was not notified of it until five months after its discovery.

As of last December, Axa Rosenberg Group LLC said that as “the specialist active global equity investment management firm” managed over $31 billion in assets. ARG is the holding company of investment advisers ARIM, which used the investment model to manage client portfolios, and BRRC, which developed the quantitative investment model’s code.

Related Web Resources:
SEC Charges AXA Rosenberg Entities for Concealing Error in Quantitative Investment Model, SEC, February 3, 2011
Read the corrected SEC order (PDF)

More Blogs on SEC Enforcement:
Ex-Portfolio Managers to Pay $700K to Settle SEC Charges that They Defrauded the Tax Free Fund for Utah, Stockbroker Fraud Blog, January 22, 2011
Schwab Settles for $119M SEC Charges It Allegedly Misled YieldPlus Fund Investors, Stockbroker Fraud Blog, January 17, 2011
Broker Settles SEC Charges He Defrauded Elderly Nuns, Stockbroker Fraud Blog, January 13, 2011 Continue Reading ›

Articles Posted in Axa Rosenberg

Institutional Investor Fraud Roundup: SEC Seeks Approval of Settlement with Ex-Bear Stearns Portfolio Managers, Credits Ex-AXA Rosenberg Executive for Help in Quantitative Investment Case; IOSCO Gets Ready for Global Hedge Fund Survey

AXA Rosenberg Entities Settle Securities Fraud Charges Over Computer Error Concealment for Over $240M