Money managers often claim to have a secret sauce. Sometimes, though, the recipe comes not from a topflight executive chef but a junior line cook.
The Securities and Exchange Commission on Monday alleged that affiliates of Aegon NV (AEG) , a giant Dutch insurer and money manager, sold mutual funds and investment products based on faulty "quantitative" models developed by an inexperienced staffer with scant training, according to a press release Monday. Such quantitative models typically involve the use of specialized computer programs to determine which assets to buy or sell. The staffer wasn't identified.
The four Aegon affiliates, which included Aegon USA Investment Management as well as Transamerica Asset Management, agreed to settle the charges by paying a combined $97 million in disgorgement of profits, interest and penalties. The violations occurred from 2011 through 2015, according to the agency.
The investment models were "developed solely by an inexperienced, junior AUIM analyst, contained numerous errors and did not work as promised," the SEC said in the press release. When Aegon and Transamerica learned about the errors, they simply stopped using the models without informing investors or disclosing the errors, the SEC alleged.
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"Investors were repeatedly misled about the quantitative models being used to manage their investments, which subjected them to significant hidden risks and deprived them of the ability to make informed investment decisions," C. Dabney O'Riordan, co-chief of the SEC enforcement division's asset-management unit, said in the press release.
In a statement, Aegon acknowledged errors in its models.
"While the models at issue are no longer in use, we recognize we must do better, and we have taken steps to enhance our policies, procedures and disclosure processes," Aegon said in a statement. "We remain confident in our investment process and are committed to continuously improving our business. We cooperated fully with the SEC throughout the regulatory investigation of the issues and are pleased to put this matter behind us."
According to a copy of an SEC order posted on the agency's web site, the computer models were supposed to provide "emotionless" investing.
But the junior analyst who developed them had "no experience in portfolio management or any formal training in financial modeling," according to the order.
"The analyst did not follow any formal process to confirm the accuracy of his work, and AUIM failed to provide him meaningful guidance, training or oversight as he developed the models, or to confirm that the models worked as intended before using them to manage client assets," the order read.
Initially, the company didn't even list the analyst as one of the managers of the relevant investment products, instead naming a senior, experienced manager as its sole overseer, the SEC alleged. In reality, according to the order, "the senior manager's knowledge and involvement in the management of these products was so limited that he was unable to confirm the accuracy of the investment process."
A year later, in 2012, the analyst was added to the fund's disclosures. According to the SEC, the analyst was terminated in August 2013.