The settlement with AXA Rosenberg Group announced by the Securities and Exchange Commission is among the largest for the agency and is the first of its kind.
The SEC said senior managers at two AXA Rosenberg affiliates knew about an error in the code for the quantitative investment model used to manage clients' assets. The agency says the error disabled a key element of the model for managing risk.
The agency said senior managers ordered others to conceal the error and failed to fix it, causing $217 million in client losses.
AXA Rosenberg, based in Orinda, Calif., is owned by French insurance company AXA SA. AXA Rosenberg, neither admitted nor denied wrongdoing in settling the case but did agree to refrain from future violations of the securities laws.
The use of quantitative models has proliferated on Wall Street.
"To protect trade secrets, quantitative investment managers often isolate their complex computer models from the firm's compliance and risk-management functions and leave oversight to a few sophisticated programmers," SEC Enforcement Director Robert Khuzami said in a statement. "The secretive structure and lack of oversight of quantitative investment models, as this case demonstrates, cannot be used to conceal errors and betray investors."
The SEC said the error came into the computer model in April 2007. It was eventually corrected, but the CEO of AXA Rosenberg Group wasn't told about it until November 2009, the agency said. The firm did its own investigation and told SEC examiners about the error in March 2010. The firm's clients were informed on April 15.
AXA Rosenberg agreed in the settlement to pay investors the $217 million they were said to have lost, as well as a $25 million civil fine. The firm also agreed to hire an independent consultant in quantitative investment techniques to review its disclosures.
"We deeply regret that the coding error adversely impacted many of our clients," AXA Rosenberg's chairman, Dominique Carrel-Billiard, said in a statement. "The exhaustive review that we undertook of this matter reflects our commitment to regaining our clients' confidence and restoring trust."
The firm noted that it has made significant changes in recent months in its organization, named new executives to several top positions and put in additional measures to control risks. In December, Jeremy Baskin was named CEO to replace Stephane Prunet.