South Florida Arbitration & Litigation Lawyer Blog
Securities FINRA Arbitration and Litigations Fraud and Mismanagement Attorney, Russell L. Forkey, Esq.
September, 2011:
On or about September 22, 2011, The Securities and Exchange Commission entered an Order Instituting Administrative and Cease and Desist Proceedings, Pursuant To Section 9(b) of the Investment Company Act of 1940, and Sections 203(f) AND 203(k) of the Investment Advisors Act of 1940, Making Findings, and Imposing Remedial Sanctions and a Cease and Desist Order against Barr M. Rosenberg.
This matter concerns an institutional money manager specialized in quantitative investment strategies that concealed from investors a material error in its computer code. AXA Rosenberg Group LLC (“ARG”) is the holding company of AXA Rosenberg Investment Management LLC (“ARIM”), the institutional money manager and SEC-registered investment adviser that utilized the code, and Barr Rosenberg Research Center LLC (“BRRC”), the SEC-registered investment adviser that developed the code. Rosenberg co-founded the firms now known as BRRC and ARG and developed and programmed BRRC’s complex automated models and an “optimization” process (the “Model”) that ARIM and affiliated offshore investment advisers (“Affiliated Advisers”) used to create and manage client portfolios. During the relevant period, Rosenberg owned or controlled a 21% interest in ARG, and Rosenberg was ARG’s Chairman.
In late June 2009, a BRRC employee discovered an error in the Model’s computer code that had been introduced in 2007 and that effectively eliminated one of the key components in the Model for controlling for certain types of risk. This employee later discussed his finding in a meeting with Rosenberg, BRRC’s Director, and a small group of BRRC employees who were working under Rosenberg’s guidance on an enhancement to the Model. Rosenberg directed the others to keep quiet about the error and to not inform others about it, and he directed that the error not be fixed at that time. Before and after discovery of the error, ARIM’s clients were expressing dissatisfaction with their portfolios’ under performance. During the several months that Rosenberg and the BRRC employees concealed the error, ARG, ARIM, and BRRC failed to disclose the error, misrepresented the Model’s ability to control risk, and ascribed under performance to market volatility and factors having nothing to do with the error. Due to Rosenberg’s directive, ARG’s Global CEO did not learn of the error as soon as he should have. The error was disclosed to the Global CEO in November 2009. The error impacted more than 600 client portfolios and caused approximately $217 million in losses. ARG disclosed the error to clients on April 15, 2010.
The SEC determined that by virtue of this conduct, Rosenberg willfully violated Sections 206(1) and 206(2) of the Advisers Act, which prohibit fraudulent conduct by an investment adviser.