TD Ameritrade, AXA Rosenberg hit with SEC enforcement actions
Thursday, February 3, 2011; 9:04 PM
TD Ameritrade brokers misled investors about the risks of a mutual fund that foundered at the height of the financial crisis, the Securities and Exchange Commission charged Thursday.
Brokers falsely described the fund as being a money market fund or as safe as cash, the SEC alleged in an administrative order that also accused the brokerage firm of failing to supervise its staff properly.
TD Ameritrade, known for its television ads featuring "Law & Order" actor Sam Waterston, settled the charges by agreeing to pay $10 million to customers who still hold shares in the fund.
Neither SEC officials nor a TD Ameritrade spokeswoman could say how much money customers had lost. No individual brokers were named in the enforcement action.
"This agreement with the SEC allows us to move forward and provide client investors with additional compensation in this difficult situation," TD Ameritrade spokeswoman Kristin Petrick said by e-mail. The company neither admitted nor denied wrongdoing.
The enforcement action involved the Reserve Yield Plus Fund, part of the Reserve family of funds whose sudden problems contributed to a deepening sense of panic in the financial markets in September 2008.
TD Ameritrade brokers sold the Yield Plus Fund based on inaccurate descriptions that it was a "money market fund," an "enhanced money market fund," or that it was insured by the Federal Deposit Insurance Corp., which backstops bank accounts, the SEC said.
The fund was actually a mutual fund that chased higher returns than money market funds and invested in instruments issued by Lehman Brothers. After Lehman Brothers sought bankruptcy protection, Reserve determined that the Lehman paper was worthless, it began liquidating the fund, and investors lost immediate access to their money.
In another SEC enforcement action announced Thursday, a money manager called the AXA Rosenberg Group and affiliates agreed to pay more than $240 million to settle charges that they defrauded institutional investors by keeping them in the dark about a malfunctioning computer program.
AXA's trading strategy was driven by a computer model, and in 2007, programmers made an error in the code. In June 2009, an employee found the error and alerted colleagues. But a senior official directed employees who knew about the error to keep it under wraps, the SEC alleged. The official was not named in the SEC action.
The case spotlighted investors' vulnerability to software glitches in an era when computers control the movement of trillions of dollars. The error involved the conversion of decimals into percentages and affected the weight given to different risk factors.
The error went uncorrected until late 2009, and AXA did not disclose it to clients until April 2010, the SEC said. By then, it had caused $217 million of losses in clients' portfolios, the SEC said.
Some clients had been concerned about the performance of their investments. AXA Rosenberg misled them by blaming market volatility and falsely claimed that the computer model was working, the SEC said.
"We deeply regret that the coding error adversely impacted many of our clients," AXA Rosenberg chairman Dominique Carrel-Billiard said in a news release Thursday. "The exhaustive review that we undertook of this matter reflects our commitment to regaining our clients' confidence and restoring trust."
The AXA businesses, which neither admitted nor denied wrongdoing, agreed to pay $217 million to cover investors' losses and $25 million as a penalty.
The market appears to have meted out some punishment of its own: AXA Rosenberg's assets under management have declined to $31 billion from $62 billion as of March 31, 2010.