• SEC Cooperation Initiative
  • March 29, 2012 | Authors: Therese M. Doherty; Arthur G. Jakoby
  • Law Firm: Herrick, Feinstein LLP - New York Office
  • On March 19, 2012, the Securities and Exchange Commission issued a press release (the "Press Release") praising a former executive of AXA Rosenberg Group LLC ("AXA") for providing material assistance under the SEC's Cooperation Initiative. The SEC established the formal program in January 2010 to encourage individuals to cooperate with the SEC in advancing the Commission's investigations and litigations. The Press Release, intended as guidance for participation in the program, noted that the SEC declined to take action against a cooperating former AXA executive and described the factors that the Commission considered in reaching its non-prosecution decision.

    The SEC charged three AXA entities and Barr A.  Rosenberg ("Rosenberg"), the firm's co-founder, with securities fraud for concealing an error in the computer code that comprised the firm's quantitative investment model.  The Commission alleged that this error was responsible for $217 million in investor losses. The Commission claimed that in June 2009, Rosenberg learned that a material error in the model's code disabled a key component for managing risk. At Rosenberg's direction, the error was not internally disclosed to AXA's CEO for more than two years, despite calls from some inside AXA, including the cooperating executive, to report the error.  After an internal investigation, AXA self-reported to the SEC examination staff in March 2010 and disclosed the error to the firm's clients on April 15, 2010.  The Commission alleged that between the time of the error and the disclosure, the firm concealed the error to clients by attributing losses to market volatility and made misrepresentations regarding the model's ability to control risk.

    The Commission simultaneously brought and settled charges against AXA in February 2011, pursuant to which AXA agreed to pay $217 million in restitution, a $25 million civil monetary penalty and accepted an independent consultant to review disclosures and enhance the firm's compliance department. The SEC initiated and settled charges against Rosenberg in September 2011, which included at $2.5 million civil monetary penalty and a lifetime securities industry bar.

    The Press Release explained that the cooperating executive voluntarily provided the Commission with timely and material assistance in the furtherance of a complex investigation.  His information was truthful, complete and reliable and was bolstered by his position in the company at the time of the wrongdoing. The SEC considered the underlying investigation to be of importance as the investigation spawned the first enforcement actions arising from errors in a quantitative investment model, which, the Press Release notes, is an area of particular interest to the Division of Enforcement.

    In declining to charge the cooperating executive, the SEC explained that he had played a limited role in the events and had advocated for disclosing the event to the CEO before being directed to do otherwise by Rosenberg.  Significantly, the cooperating executive had retired from the industry, was not in a position of public or financial trust and had no disciplinary or regulatory history and was therefore not a threat to commit future violations of federal securities law.  The SEC made special note that the cooperating executive, who requested to be considered under the Cooperation Initiative, did not request anything in exchange for his assistance.

    In commenting on this matter and advocating the SEC's Cooperating Initiative, Robert Khuzami, the Director of the SEC Division of Enforcement, stated "[t]his [matter] demonstrates that the Enforcement Division fully recognizes the value of cooperation in SEC investigations, and will seek to reward such cooperation appropriately." 

    While the SEC's publicity of its non-prosecution decision is seemingly to provide guidance under the Commission's Cooperative Initiative, it provides an additional and important lesson. Through a clearly articulated and effective internal reporting structure for suspicions of wrong-doing, firms can take steps to investigate any allegations at an early stage and to position themselves to manage potentially adverse situations.