It's not the mistake or even the crime that slaughters your reputation - it's the cover-up.
Richard Nixon learned that lesson the hard way. Now it's Barr Rosenberg's turn. The famed quant's ouster from the influential fund company that bears his name is a sobering reminder that promptly owning up to errors - even costly ones - is essential for both businesses and individuals.
Rosenberg's firm, owned by Paris-based AXA S.A., notified clients in April that it had discovered a coding error that may have affected performance of its portfolios. In response, public retirement systems in California, Florida and Ohio pulled out of funds managed by AXA Rosenberg. Also, Charles Schwab Corp. decided to close four mutual funds AXA Rosenberg ran. Within weeks, the firm's client assets plummeted more than 30 percent, from $62 billion on March 31 to $41 billion on May 31.
Firm Waited Almost a Year Before Alerting Clients
But those clients didn't flee because of damage the error might have caused their portfolios. Instead, the killer for them was a nearly year-long gap between the error's initial discovery in June of 2009 and when it was finally reported to clients.
Ohio pension fund spokesman Tim Barbour told the New York Times: "It wasn't so much the coding error itself," but that it took so long "to inform us of the error. It is a fundamental question of trust."
Similarly, the long delay before the disclosure to investors led the Marin County (Calif.) Employees' Retirement Association to to pull its $16.5 million investment from an AXA Rosenberg portfolio, its administrator told The Wall Street Journal. And the Florida Retirement System Pension Plan, which also withdrew funds, says, "We just concluded that AXA Rosenberg's control process was inadequate."
Wrapping up an internal investigation that found senior executives had deliberately covered up the error, the firm announced this week a series of management and organizational changes. Founder Barr Rosenberg and Research Director Thomas Mead left the board of directors, and Agustin Sevilla stepped down as global chief investment officer but will move to an unnamed senior research role. A letter to clients, published on AXA Rosenberg's website and dated June 30, states:
The Board has determined that Barr Rosenberg and Tom Mead, Director of Research, did not act in accordance with the firm's Escalation Policy and Code of Ethics. Specifically, the review concluded that both acted to limit dissemination of information regarding the error and to preclude discussion about its correction and communication at the proper levels in the firm. It also confirmed that Agustin Sevilla, Global Chief Investment Officer, did not act in a manner that was consistent with the firm's Escalation Policy.
Along with naming replacements for those executives and other organizational changes, the firm says it is on the verge of hiring "a senior Chief Risk Officer with extensive investment experience."