(Bloomberg) -- Two Sigma Investments waited four years to address vulnerabilities that hedge fund employees noticed in its investment models and violated a rule protecting whistleblowers, the US Securities and Exchange Commission alleged.
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The firm’s Two Sigma Investments and Two Sigma Advisers agreed to pay a total of $90 million in civil penalties to settle the SEC claims and voluntarily repaid $165 million to affected funds and accounts, the regular said Thursday in a cease-and-desist order.
Two Sigma, which manages more than $60 billion, didn’t admit to or deny the allegations.
In 2023, Bloomberg reported that a Two Sigma researcher allegedly tampered with the firm’s models, resulting in losses for some clients and gains for others. That resulted in about $165 million of losses for some clients and more than $400 million of gains for others, the SEC said. In October of that year, the firm described the events to investors as “intentional misconduct by circumventing our modeling practices.”
The firm reported the problems to SEC examiners, the regulator said in the order. Two Sigma’s billionaire founders, meanwhile, had been engaged in a long-running feud and stepped down as co-CEOs last year.
The SEC determined that Two Sigma employees pointed out to management in 2019 that numerous staff had unfettered access to a database that stored parameters for some of the firm’s trading models. Model parameters are inputs that affect the system’s predictions for stocks. Employees proposed ways to address their concerns that personnel could change parameters and affect investment decisions. Still, Two Sigma waited four years to tackle the issue, the agency said.
“Despite recognizing these vulnerabilities, Two Sigma failed to adopt and implement written policies and procedures to address them and failed to supervise one of its employees who made unauthorized changes to more than a dozen models, which resulted in Two Sigma making investment decisions that it otherwise would not have made on behalf of its clients,” the SEC said.
The regulator also found that Two Sigma violated the agency’s whistleblower-protection rule, as the firm required any departing staff state that they had not filed any complaint with the government. The firm “willfully violated” rules by prohibiting an individual from communicating with the SEC about a possible securities-law violation, according to the order.