Chairman/Controlling Shareholder of Quant Manager Barred from Industry for Concealing Programming Error in Risk Model
The SEC banned from the industry the chairman and controlling shareholder of a large quant manager accused of concealing an error in the quant model and causing over $200 million in client losses. According to the SEC, an employee responsible for implementing the model reported the error to the respondent and several key employees. The SEC alleges that the respondent ordered the group to conceal the error and lied to the firm’s Board, CEO, and customers. The SEC says that the faulty model resulted in significant client losses. The SEC charges direct violations of Sections 206(1) and 206(2), which prohibit an investment adviser from engaging in any fraudulent conduct.
OUR TAKE: We’ll avoid the Watergate-like bromides about making mistakes and concealing information. Perhaps most interesting is the SEC charging a corporate officer with direct violations of Sections 206(1) and 206(2), which prohibit an investment adviser from engaging in fraudulent conduct. Those sections do not address actions by officers or controlling shareholders, who are usually charged with the lesser offense of aiding and abetting.