Barr Rosenberg Charged with Fraud in Risk Model Case

The Securities and Exchange Commission charged the co-founder of institutional money manager AXA Rosenberg with securities fraud for concealing an error in the computer code that helped the company manage risk for its customers and itself.

The SEC charged that former chairman Barr M. Rosenberg learned of the error in June 2009 but directed others to keep quiet about it and not fix it immediately.

Rosenberg has agreed to settle the SEC's charges by paying a $2.5 million penalty and consenting to a lifetime securities industry bar.

Rosenberg denied the existence of any significant errors in the model during an October 2009 board meeting discussion about its performance, the SEC said.

AXA Rosenberg disclosed the error to SEC examination staff in late March 2010. The error was not disclosed to clients until April 2010, causing $217 million in losses.

The SEC previously charged AXA Rosenberg and its affiliated investment advisers, and they agreed to pay $217 million to harmed clients plus a $25 million penalty.

"Rosenberg chose concealment over candor, and in doing so selfishly served his interests over those of his clients," said Robert Khuzami, Director of the SEC's Division of Enforcement.

According to the SEC's order, Rosenberg created the model, oversaw research projects to improve and enhance it, and exercised significant authority throughout the AXA Rosenberg organization.

The material error in the model's computer code disabled one of its key components for managing risk and affected the model's ability to perform as expected.

The SEC's order found that due to Rosenberg's misconduct, AXA Rosenberg and its affiliated investment advisers misrepresented to clients that the model's underperformance was attributable to factors other than the error, and inaccurately stated that the model was controlling risk correctly.

Rosenberg's instructions to delay fixing the error caused additional client losses, the SEC said.

When AXA Rosenberg agreed to pay $217 million to cover investor losses as well as a $25 million civil penalty, the SEC said it found 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,'' the SEC said.

AXA Rosenberg announced in July 2010 that chairman Barr Rosenberg resigned following an investigation into errors in the company's data systems.

The case has implications for operations managers, which the SEC says are responsible for immediately reporting and rectifying errors.

-- This article first appeared on Securities Technology Monitor.