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Citing The Example of an AXA Rosenberg Executive, the SEC Provides Regarding How Individuals May Receive Credit Under the SEC’s Cooperation Initiative

Posted in Executive Officer Matters, SEC Enforcement Cases, SEC Settlements: Policy, Issues and Disputes

Normally, when the SEC posts a Litigation Release on its website, it announces a new case which it has filed, or settlement or judgment in a previously-announced case. One of the SEC’s Litigation Releases posted on March 19, 2012 was unique in that it did not announce any of those usual events, but instead was issued "to provide guidance regarding the circumstances under which individuals may receive credit as part of the SEC’s Cooperation Initiative." The announcement this week focused on the acts of a un-named (and un-charged) senior executive at AXA Rosenberg, an institutional money manager that specialized in quantitative investment strategies, who cooperated with the SEC, leading to charges regarding a material error in a computer code that was used to manage client assets.

On February 3, 2011, the SEC announced that it had filed an Administrative Proceeding charging AXA Rosenberg Group LLC, AXA Rosenberg Investment Management LLC, and Barr Rosenberg Research Center LLC with securities fraud for concealing a significant error in the computer code of the quantitative investment model that they use to manage client assets. The three entities agreed to settle by paying $217 million to harmed clients (which equaled the amount of losses), plus a $25 million penalty. They were also required to hire an independent consultant with expertise in quantitative investment techniques to review disclosures and enhance compliance.

On September 22, 2011, the SEC announced that it filed an Administrative Proceeding against Barr M. Rosenberg, the co-founder of AXA Rosenberg, charging him with securities fraud for concealing the error in the computer code (which he had developed and provided to the firm). The Commission claimed that he learned of the error in June 2009, but instructed others to remain quiet about. AXA Rosenberg disclosed the error to SEC examination staff in late March 2010 after being informed of an impending SEC examination. Mr. Rosenberg agreed to settle the SEC’s charges by paying a $2.5 million penalty and consenting to a lifetime securities industry bar.

According to the SEC, a senior executive who was not identified "was the first to offer his cooperation and voluntarily requested to be considered under the SEC’s Cooperation Initiative." That Initiative was announced on January 13, 2010 (shortly before the SEC announced the initial charges against AXA Rosenberg). Specifically, the Commission announced a Policy Statement Concerning Cooperation by Individuals in its Investigations and Related Enforcement Actions, stating:

Although the evaluation of cooperation requires a case-by-case analysis of the specific circumstances presented, as described in greater detail below, the Commission’s general approach is to determine whether, how much, and in what manner to credit cooperation by individuals by evaluating four considerations: the assistance provided by the cooperating individual in the Commission’s investigation or related enforcement actions ("Investigation"); the importance of the underlying matter in which the individual cooperated; the societal interest in ensuring that the cooperating individual is held accountable for his or her misconduct; and the appropriateness of cooperation credit based upon the profile of the cooperating individual.

In its Policy Statement, the Commission noted that it was able to reward cooperation in a variety of ways, ranging from "taking no enforcement action to pursuing reduced charges and sanctions in connection with enforcement actions."

In evaluating the cooperation of the AXA Rosenberg senior executive on Monday, the SEC examined and discussed each of the four considerations.

• With respect to the assistance provided, the Commission stated that the senior executive provided "substantial assistance," which allowed the SEC "to conduct an efficient and effective investigation" of this complex matter, emphasizing the "timeliness and quality" of his cooperation. The SEC said he "was forthcoming and provided truthful, complete, and reliable information … without conditions," which "enhanced his credibility" in that "he had not been promised any specific outcome in exchange for his truthful testimony."

• With respect to the importance of the underlying matter, the SEC noted that the actions against Mr. Rosenberg and the companies "were the first ever arising from errors in a quantitative investment model and fully addressed the harm caused by the misconduct." The Commission emphasized that, as a result, the settlement allowed the clients to recover their losses in full.

• With respect to the interest in holding the person cooperating accountable, the Commission noted that "the senior executive played a limited role in events surrounding concealment of the coding error," and that "he advocated that AXA Rosenberg’s CEO be informed of the error." His cooperation "maximized the SEC’s law enforcement interests" and helped bring about a "quick and successful resolution" of the matters.

• In examining the cooperating person’s profile, the Commission concluded that was "no longer in a position to commit future violations of the federal securities laws" because he retired from the industry.

After considering these factors, the SEC elected not to take enforcement action against the senior executive. At the same time, the Commission noted that its evaluation "was dependent upon the unique facts and circumstances of this case," and pointed out that it did not "create or recognize any legally enforceable rights for any person."

The SEC has previously provided guidance regarding what individuals and companies can do to receive credit, as it did on May 17, 2011 when it announced that it had entered into a Deferred Prosecution Agreement when settling an FCPA matter with Tenaris S.A., as discussed here.