A developer of financial software has agreed to pay $2.5 million to settle charges stemming from his concealment of a bug that caused about $217 million in investment losses.
Barr M. Rosenberg, 68, of Sea Ranch, California, developed the quantitative investment modeling software and put it into production in 2007 to help clients make investment decisions. The program captured and processed huge amounts of data contained in financial reports and other publicly available information to balance publicly traded company's earnings and valuation against common risk factors.
After pioneering the field and serving as the original developer, he went on to oversee code improvements over the next few years.
In 2009, an employee of Rosenberg's company, Barr Rosenberg Research Center, discovered a two-year-old bug in the code that caused it to incorrectly calculate risks. The error stemmed from the failure to reconcile the use of decimals in some of the data and percentages in other information, causing risks to routinely be underrepresented. The employee disclosed his findings to Rosenberg and the firm's board of directors that same year.
“Rosenberg directed the others to keep quiet about the error and to not inform others about it, and he directed that the error not be fixed at that time,” officials with the Securities and Exchange Commission alleged (PDF). The error caused about $217 million in losses to more than 600 client portfolios.
In addition to paying the $2.5 million penalty, Rosenberg agreed to never again work in the securities industry.
The SEC said Rosenberg willfully violated anti-fraud provisions of the Investment Advisers Act of 1940. He agreed to the penalties without admitting or denying the SEC's findings.
The agreement comes seven months after a related Rosenberg firm, AXA Rosenberg, agreed to pay $242 million to settle charges. ®
This article was updated to make clear the amount of investment losses was "about $217 million," that 2007 was the year the software went into production, and that AXA Rosenberg and Barr Rosenberg Research Center are related firms.