In April of 2010, AXA Rosenberg, a privately owned investment management company, sent a letter (see PDF here) to its clients stating that it had discovered a "coding error that affected the flow of information between the risk model and our portfolio optimization process." As a result, "common-factor risks were significantly underrepresented."
The error, which was discovered in later June 2009 wasn't corrected until between September and mid-November 2009. The error actually was introduced into the company's risk model in early 2007, and led to investors losing a total of $217 million.
However, according to the US Security and Exchange Commission (SEC), after the error was discovered in June 2009:
"Instead of disclosing and fixing the error immediately, senior ARG [AXA Rosenberg Group LLC] and BRRC [Barr Rosenberg Research Center LLC] officials directed others to keep quiet about the error and declined to fix the error at that time."
According to this report last July at APBankers, the founder of AXA Rosenberg, Barr Rosenberg, and Tom Mead, director of research, resigned because of their role in the affair. Proves again the old maxim that the cover-up is as bad if not worse than the error.
The SEC found such actions constituted fraud, and in a settlement agreement with AXA, fined the company $25 million. The company, which neither admitted or denied the SEC findings, also agreed to pay $217 million to investors. Furthermore, the company agreed to hire "... an independent consultant with expertise in quantitative investment techniques who will review disclosures and enhance the role of compliance personnel."
This may not be the end of it, though. A story at Court House News reports the Government of Guam Retirement Fund has brought a Federal class action lawsuit against AXA claiming that the $217 million being paid back to investors "is wholly insufficient to compensate investors for the full amount of their damages."
Story reports that the Government of Guam Retirement Fund seeks damages to be determined at a jury trial.
Robert N. Charette is a Contributing Editor to IEEE Spectrum and an acknowledged international authority on information technology and systems risk management. A self-described “risk ecologist,” he is interested in the intersections of business, political, technological, and societal risks. Charette is an award-winning author of multiple books and numerous articles on the subjects of risk management, project and program management, innovation, and entrepreneurship. A Life Senior Member of the IEEE, Charette was a recipient of the IEEE Computer Society’s Golden Core Award in 2008.