SEC settles lawsuits against US hedge funds over investment model weaknesses

By Kanishka Singh

WASHINGTON (Reuters) – The U.S. Securities and Exchange Commission on Thursday sued hedge fund Two Sigma for failing to address known weaknesses in its investment models, the regulatory agency said.

Two Sigma voluntarily paid $165 million for funds and accounts affected by the SEC’s investigation and agreed to pay a $90 million civil penalty to settle the SEC’s charges, the agency said in a statement.

The SEC said on or before March 2019, Two Sigma employees identified vulnerabilities in certain Two Sigma investment models that could negatively impact clients’ investment returns, but the hedge fund waited until August 2023 to address the issues.

Although Two Sigma recognized these weaknesses, it failed to implement written policies and procedures to address them and failed to control one of its employees who made unauthorized changes to more than ten models, which otherwise led Two Sigma to make investment decisions. The SEC added that he did not act on behalf of his clients.

“After proactively reporting the issue to 2023 and quickly remediating the negatively impacted clients, Two Sigma is pleased to reach a resolution with the SEC, putting this matter behind us,” said a hedge fund spokesperson.

The hedge fund, which has $60 billion in assets under management, said: “We are committed to operating with absolute integrity and have made various improvements to our operating policies, procedures and controls.”

(Reporting by Kanishka Singh in Washington; Editing by Chris Reese and Nia Williams)