Thursday, September 22, 2011

What Would his Mother Say?

Fascinating.  If you've read Peter L. Bernstein's Capital Ideas, subtitled The Improbable Origins of Modern Wall Street, you'll remember Barr Rosenberg as one of the heroes of the piece--one of the first of the quants, those guys who treat the market as a kind of N-dimensional chess game, churning out mathematical models that barely exceed their own vision and imagination.   But also, by Bernstein's account, a thoroughly nice man. We're told that mama was a poet and papa, a Shakespeare scholar; that "even as a young boy, he came to appreciate the 'interplay of diverse interests enacted so eloquently by Shakespeare's characters.'"

Well, grant that Bernstein seemed to get along with everybody.  Anyway,  now Joel calls my attention to this:

The Securities and Exchange Commission has charged Barr Rosenberg, a leading academic and quant fund manager, with fraud. Without admitting or denying guilt, Rosenberg has agreed to a consent decree that requires him to pay a $2.5 million fine and bars him from the securities and investment advisor industries.

The 68-year-old Rosenberg owned 21 percent of AXA Rosenberg (ARG) during what the SEC describes as the relevant time when the alleged fraud was committed. He was also the owner of the Barr Rosenberg Research Center (BRRC).

The agency alleges that in late June 2009 a BRRC employee discovered an error in the code of a complex automated optimization model that caused $217 million in losses in about 600 client portfolios. After the employee discussed his finding with Rosenberg and other employees, the SEC claims Rosenberg directed them to keep quiet about the error and not to inform anyone else about it.  ... Clients reportedly were not informed of the error until 2010. In mid-to-late 2009 ... [w]hen a director inquired about its underperformance, the SEC claims Rosenberg responded that he was "not aware of siginificant" mistakes and added that "if there are any [they] will not be made in the future." ARG's CEO remained in the dark until November 2009 when a BRRC employee felt required to inform him.
Leapin' lizards.   And as is so often the case. part of what takes your breath away is the apparent crudity and vulgarity of the offense. Not "the Napoleon of crime," but a simple case of "let's not talk about that."

Back in my bankruptcy days, when I had more first-hand exposure to grand theft bookkeeping than I had before or since, I often wondered--were these guys monsters, or just people who did things they forgot to tell their Sunday school teacher about?  I suppose the tedious answer is "a little of both,"  But in general, my guess is that there aren't that-all many monsters down in the financial fraud circle--not so many as des hommes moyen incorruptibles folk who find themselves standing unobserved in front of Scrooge McDuck's open vault and say--wait, what?

I suppose some might say that $217 million is a lot of money (heh!).  But what if he'd just yelled "mistake!" as they are supposed to do on the trading floor when things go bollywackers?  At the end of the day, I'll bet the actual loss to be absorbed would have turned out to be a lot less.   It might have put dent in his charitable foundation, his grandchildren's spending money, but I'll bet it wouldn't have changed his own style of life by a dime.  And he wouldn't have had to worry about what his mother the poet--or his father's bud, Shakespeare--might say.

Afterthought:  And the whistleblower?  I'd like to think he got a nice little cash reward and a big hug from the CEO.  But a little voice is telling me to speculate that he got fired and stripped of all benefits.  I suppose I'll never know.

Followup:  More on motherhood here.

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