Two Sigma Settles SEC Charges for Investment Model Failures and Whistleblower Rule Violations

Posted on January 30th, 2025 at 4:18 PM
Two Sigma Settles SEC Charges for Investment Model Failures and Whistleblower Rule Violations

From the desk of Jim Eccleston at Eccleston Law

According to SEC.gov, the Securities and Exchange Commission (SEC) recently announced that Two Sigma Investments LP and Two Sigma Advisers LP (collectively, Two Sigma) agreed to settle charges of breaching fiduciary duties, compliance failures, and violations of the SEC’s whistleblower protection rule. As part of the settlement, Two Sigma voluntarily reimbursed $165 million to affected funds and accounts and will pay $90 million in civil penalties.

The SEC found that in or before March 2019, Two Sigma identified vulnerabilities in its investment models that could negatively affect client returns but did not address these issues until August 2023. During this time, the firm failed to adopt and implement written policies to mitigate the vulnerabilities and did not supervise an employee who made unauthorized changes to more than a dozen models. Those failures caused Two Sigma to make investment decisions it otherwise would not have made on behalf of its clients.

The SEC also discovered that Two Sigma violated the whistleblower protection rule by requiring departing employees to state in separation agreements that they had not filed complaints with any government agency. This provision could discourage individuals from reporting potential securities law violations and prevent them from receiving whistleblower protections.

The SEC determined that Two Sigma willfully violated the antifraud provisions of the Investment Advisers Act of 1940, the Act’s compliance rule, and Rule 21F-17(a) under the Securities Exchange Act of 1934, which protects whistleblowers. Without admitting or denying the SEC’s findings, Two Sigma agreed to a cease-and-desist order, censure, and $45 million penalties for each entity, totaling $90 million.

 

Eccleston Law LLC represents investors and financial advisors nationwide in securities, employment, transition, regulatory, and disciplinary matters.

Tags: eccleston, eccleston law, sec

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