The SEC credited the substantial cooperation of a former AXA Rosenberg senior executive during the agency’s investigation into the nondisclosure of a coding error in the firm’s quantitative investment process. The investigation resulted in two settled enforcement actions last year against AXA Rosenberg Group LLC and Barr M. Rosenberg. The Commission issued a litigation release to provide guidance regarding the circumstances under which individuals may receive credit as part of the SEC’s Cooperation Initiative.
The SEC found that AXA Rosenberg, an Orinda, Calif.-based institutional money manager that specialized in quantitative investment strategies, concealed a material error in the computer code of the model it used to manage client assets. The error impacted more than 600 client portfolios and caused approximately $217 million in losses.
The SEC credited the senior executive for his cooperation by declining to take enforcement action against him based on certain factors identified in its Policy Statement Concerning Cooperation by Individuals in its Investigations and Related Enforcement Actions.
Assistance Provided – The senior executive’s substantial assistance enabled the SEC to conduct an efficient and effective investigation of a complex matter. The SEC determined that his cooperation proved valuable because of its timeliness and quality, which allowed the SEC to conserve its investigative resources. At the outset of the investigation, the senior executive was the first to offer his cooperation and voluntarily requested to be considered under the SEC’s Cooperation Initiative. In meetings with SEC staff, the senior executive was forthcoming and provided truthful, complete, and reliable information. In particular, his position in the organization, relationship with charged parties, and intimate knowledge of the quantitative investment models allowed him to provide detailed and credible information that was important to the SEC staff’s investigation. The senior executive provided substantial assistance without conditions. By doing so, he enhanced his credibility by showing that he had not been promised any specific outcome in exchange for his truthful testimony.
Importance of the Underlying Matter – The SEC’s investigation involved concealment of a material error within quantitative investment models and the compliance policies and procedures for these models, a priority area for the Division of Enforcement. The resulting enforcement actions were the first ever arising from errors in a quantitative investment model and fully addressed the harm caused by the misconduct. The SEC was able to return clients all of their $217 million in losses, and imposed additional penalties totaling $27.5 million. The agency also required the AXA entities to hire an independent consultant to conduct a comprehensive study of their compliance and control procedures.
Interest in Holding the Senior Executive Accountable – While the senior executive played a limited role in events surrounding concealment of the coding error, he advocated that AXA Rosenberg’s CEO be informed of the error. The SEC found that Rosenberg gave the senior executive and others the instructions to conceal the error and not fix it. The SEC also found that the AXA entities made material misrepresentations and omissions about the error to clients. The senior executive’s cooperation maximized the SEC’s law enforcement interests by facilitating the quick and successful resolution of its enforcement actions against Rosenberg and the AXA entities.
The Senior Executive’s Profile – The senior executive is not an associated person of any regulated entity, a fiduciary for other individuals or entities regarding financial matters, or an officer or director of a public company. He does not have any disciplinary or regulatory history. In addition, he resigned from his positions at the AXA entities and has retired from the investment advisory industry. Taking all these factors together, the senior executive is no longer in a position to commit future violations of the federal securities laws.
Robert Khuzami, director of the Division of Enforcement, stated that the first-hand evidence of wrongdoing possessed by cooperators can significantly enhance the Commission's ability to stop fraud, secure strong settlement and trial outcomes and return funds to harmed investors. Cooperating witnesses enable investigations to be conducted more quickly and efficiently due to the high-quality nature of their evidence and increase the likelihood of stopping ongoing misconduct. Cooperators also help to build better cases involving complex markets, transactions and products, according to the director.
The SEC emphasized that the evaluation of the senior executive’s cooperation was dependent upon the unique facts and circumstances of this case, and that the statement does not create or recognize any legally enforceable rights for any person.