The Securities and Exchange Commission has charged money manager AXA Rosenberg's co-founder with securities fraud for concealing a computer code error in a quantitative investment model he developed, costing clients millions of dollars.
Barr Rosenberg created the model, oversaw research projects to improve it, and "exercised significant authority" throughout the company he co-found, says the watchdog.
However, the model contained a "material error" in its computer code which disabled one of its key components for managing risk and affected its ability to perform as expected.
Rosenberg learned of the problem in June 2009 but directed others to keep quiet about it and not fix it immediately, says the SEC. He then denied the existence of any "significant errors" in the model during a board meeting discussion about its performance that October.
AXA Rosenberg eventually went to the SEC in March 2010 after the company was told it was about to be examined. Clients - who lost $217 million thanks to the faulty code - were informed the following month.
In February the company, a unit of French insurer Axa, agreed to pay $217 million to harmed clients and a penalty of $25 million, without admitting or denying the SEC findings.
Now co-founder, Barr Rosenberg has also agreed to settle charges by paying a $2.5 million penalty and consenting to a lifetime securities industry bar.
Bruce Karpati, co-chief, asset management unit, division of enforcement, SEC, says: "Investors in quant funds trust their advisers to develop, maintain and operate the quant models that drive a fund's performance. Rosenberg betrayed investors when he failed to disclose the material coding error."