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Axa Rosenberg pays $242m over quant coding cock-up and cover-up

04 February 2011  |  12156 views  |  0 Man writing graphs on glass wall

Investment firm Axa Rosenberg has agreed to pay $242 million to settle SEC charges that it covered up a computer code error in its quantitative investment model that cost clients millions of dollars.

The firm, a unit of French insurer Axa, will pay $217 million to harmed clients and a penalty of $25 million, although it has not admitted or denied the SEC findings.

According to the watchdog, senior management at Axa Rosenberg units learned in June 2009 that there was a "material error" in the model's code that disabled one of the key components for managing risk.

Yet, instead of disclosing and fixing this error immediately, a senior official directed others to keep quiet about it and declined to fix the problem.

The firm's CEO only learned of the issue in November 2009 and an internal investigation was set up. The SEC was informed in March 2010 after the company was told it was about to be examined with clients finally not hearing of the problem until April.

The SEC also slammed Axa Rosenberg for misrepresentations and omissions about the error to clients, attributing the model's under-performance to market volatility.

Meanwhile, the coding process for the model represented a serious compliance risk because accurate coding is required for it to function properly and in the manner represented to clients.

Robert Khuzami, director, division of enforcement, SEC, says: "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. The secretive structure and lack of oversight of quantitative investment models, as this case demonstrates, cannot be used to conceal errors and betray investors."

In a statement, Dominique Carrel-Billiard, chairman, Axa Rosenberg, says: "We deeply regret that the coding error adversely impacted many of our clients. The exhaustive review that we undertook of this matter reflects our commitment to regaining our client's confidence and restoring trust."

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