TRADER LOSES $120,000 but TD Ameritrade refuses to honor their policy of making customers whole ….

AXA Rosenberg fined $242 Million for hiding and not fixing computer glitch from clients

A unit of French insurer AXA SA agreed to pay $242 million to settle fraud accusations by the Securities and Exchange Commission that it hid from clients for nearly a year a serious software glitch in a quantitative investment model.


The agreement—announced Thursday by the SEC, AXA Rosenberg Group LLC and two subsidiaries of the Orinda, Calif., firm—is the first of its kind against quantitative investment funds. Such funds use sophisticated computer models to determine trading strategies.


The SEC has intensified its scrutiny of quantitative-trading firms since last year’s “flash crash,” which deepened concerns that rogue computer models could unleash chaos in financial markets.


“This is a wake-up call to quant managers who might otherwise rely on a secretive culture and complex computer models to keep material information from investors,” Bruce Karpati, co-chief of the SEC’s asset-management unit, said in an interview.


AXA Rosenberg, which has $31 billion in assets, didn’t admit or deny wrongdoing as part of the settlement.


Terms of the deal call for the firm to pay a $25 million fine, hire an outside consultant to strengthen its compliance controls and repay investors $217 million in losses caused by the error.


The SEC said a coding error disabled certain risk-management controls, causing 608 of AXA’s 1,421 client portfolios to suffer losses.


The investment-management firm notified clients of the coding error last April. In June, AXA said that two top employees “acted to limit dissemination of information regarding the error and to preclude discussion about its correction and communication at the proper levels in the firm.”


AXA said Thursday that it hopes the settlement will mark the “beginning of a new era.” Investors have punished AXA Rosenberg since the glitch was disclosed, withdrawing half of the $62 billion in assets under management as of April.


The SEC revealed new details of efforts taken to cover up the computer error by senior management at AXA Rosenberg and its quantitative-research arm, called Barr Rosenberg Research Center LLC.


After a junior employee discovered the error in June 2009, a “senior official” ordered staff to keep quiet and not fix the problem, the SEC said Thursday. The agency said clients who voiced “substantial concerns” about the poor performance of their portfolios were told it was due to market volatility and other factors, not the model’s failings.


In October 2009, the unidentified senior official told an AXA Rosenberg board meeting convened to discuss the poor investment performance that he was “not aware of significant” mistakes in the model, the SEC said.


The firm’s chief executive later learned about the error from another employee, but AXA Rosenberg didn’t notify the SEC about the glitch until the firm was informed in March 2010 that the agency was about to conduct an examination.


People familiar with the matter said the senior official is Barr Rosenberg, chairman of AXA Rosenberg at the time of the glitch. Mr. Rosenberg and former research director Tom Mead, another top employee involved in the coverup, according to the firm, no longer work there. Messrs. Rosenberg and Mead couldn’t be reached for comment. Lawyers for AXA Rosenberg didn’t immediately return calls seeking comment.


The SEC said its investigation into the matter is continuing. The probe is focusing on individuals involved in the coverup, according to people familiar with the matter.


“We deeply regret that the coding error adversely impacted many of our clients,” Dominique Carrel-Billiard, chairman of AXA Rosenberg, said in a statement.


The case is likely to be just the first by the SEC as it steps up scrutiny of the quantitative-investment sector. Quantitative equity managers had about $400 billion of assets under management as of December, according to Barclays Capital.


SEC officials want to know if quantitative-trading firms do enough to monitor their algorithms for coding errors that could amplify risks of losses or disrupt markets, said people familiar with the matter.


Such errors could expose firms to enforcement action, even if there is no intention by the firm to manipulate the market, according to people familiar with the matter.


The SEC also is looking at the whether investors are being given sufficient information about the levels of risk inherent in the computer models, according to people familiar with the situation. They said investigators are probing whether quantitative investors might be purposely coordinating trades in ways that distort prices, potentially disadvantaging other investors.




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