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AXA Rosenberg Settles Coding-Error Case With SEC

Plus, Ariel launches a new fund, Fairholme's bond fund dives into equities, and more.

Morningstar Analysts, 02/07/2011

AXA Rosenberg has agreed to pay more than $240 million to settle charges that it concealed from clients a significant error in the computer code of the quantitative investment model that the firm uses to manage money, according to the SEC.

The SEC says the error caused $217 million in investor losses. It's the first time the firm or regulators have disclosed how much the error, first revealed nearly a year ago, cost investors.

AXA Rosenberg has agreed to settle the SEC's charges by paying $217 million to harmed clients plus a $25 million penalty. The firm, which manages approximately $31 billion in assets as of Dec. 31, 2010, settled without admitting or denying the SEC's findings. The firm was also required to hire an independent consultant with expertise in quantitative investment techniques who will review disclosures and enhance the role of compliance personnel.

The SEC's investigation found that senior management learned in June 2009 of a material error in the model's code that disabled one of the key components for managing risk. Instead of disclosing and fixing the error immediately, a senior official directed others to keep quiet about the error and declined to fix the error at that time.

The SEC found that the error, which was introduced into the model in April 2007, was eventually fixed for all portfolios. Knowledge of the error was kept from top AXA Rosenberg officials until November 2009 and from clients until April 2010.

The SEC's order found that the firm made material misrepresentations and omissions about the error to its clients. According to the SEC, the firm failed to disclose the error and its impact on client performance, attributed the model's underperformance to market volatility rather than the error, and misrepresented the model's ability to control risks.

The error cost AXA Rosenberg a lot of assets and business. Institutional investors and mutual fund families for which the firm had managed money, including Schwab and Vanguard, fired it in the wake of the controversy.

Ariel Launches First New Fund in Five Years
Ariel Investments, LLC, launched Ariel Discovery ARDFX this week. It is the firm's fourth fund and its first since it launched Ariel Focus ARFFX almost five years ago.

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