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Two Sigma Settles SEC Charges

New York-based investment advisors Two Sigma Investments LP and Two Sigma Advisers LP have settled SEC charges and repaid funds after a researcher made unauthorized changes to the firm’s investment models used to make investment decisions. Known collectively as “Two Sigma,” the firm paid $90 million in civil penalties to settle the SEC claims, then voluntarily repaid $165 million to affected funds and client accounts.

The firm failed to handle vulnerabilities in its investment models and address multiple supervisory and compliance breakdowns. Separately, two employees warned the firm repeatedly about the possibility of unauthorized changes to the models, and how any changes could have severe negative impacts on the firm and the firm's customers.

Unfortunately, Two Sigma did not act upon their information immediately, and an employee tampered with the investment models without authorization. Additionally, Two Sigma violated Whistleblower protection rules in exit contracts for departing employees.New York-based investment advisors Two Sigma Investments LP and Two Sigma Advisers LP have settled SEC charges and repaid funds after a researcher made unauthorized changes to the firm’s investment models used to make investment decisions. Known collectively as “Two Sigma,” the firm paid $90 million in civil penalties to settle the SEC claims, then voluntarily repaid $165 million to affected funds and client accounts.

The firm failed to handle vulnerabilities in its investment models and address multiple supervisory and compliance breakdowns. Separately, two employees warned the firm repeatedly about the possibility of unauthorized changes to the models, and how any changes could have severe negative impacts on the firm and the firm’s customers.

Unfortunately, Two Sigma did not act upon their information immediately, and an employee tampered with the investment models without authorization. Additionally, Two Sigma violated Whistleblower protection rules in exit contracts for departing employees.

Modeling

The first part of the settlement relates to Two Sigma’s computer-based algorithmic investment models that are used to create forecasts the firm uses to make investment decisions. A pair of hedge fund employees repeatedly warned the company that the models were vulnerable to unauthorized alterations to the decision-making software.

The firm waited four years to make changes to take action to prevent unauthorized changes to its investment models, by which time an employee had made changes to the models that affected the outcome of many investment decisions. Some accounts did well while others suffered significant losses.

Two Sigma also failed to supervise an employee working on the investment models. Known as a “modeler,” this employee made unauthorized changes to model parameters for fourteen live-trading models between November 2021 and August 2023. These changes caused models to perform differently than expected, resulting in unintended investment decisions. His purpose for altering the models was to improve his compensation.

Whistleblower Rule Violations

Two Sigma also violated whistleblower protection rules about two exiting employees who brought the matter to the firm’s attention. From April 2019 through February 2024, 2 Sigma required exiting employees to sign a separation agreement that stated that they had not spoken with any authorities, such as the SEC, to report any potential securities law violations. If they had, they would risk losing any separation payments, severance pay, benefits, or other final financial incentives. The separation agreements further authorized Two Sigma to file an arbitration seeking various financial and non-financial remedies against any employee who contravened the agreements. From April 2019 until February 2024, nearly three hundred exiting employees signed the firm’s separation agreements with the employee representation.

In this way, Two Sigma violated the Whistleblower protection rules by preventing departing employees from receiving severance or other payments following employment termination. Employees did have the option of reporting this information after they left the firm.

But for the three hundred employees that previously left the company during that time, the SEC found no evidence that the firm had ever enforced that clause. Under the agreement with the SEC, Two Sigma contacted all affected former employees about their rights under Rule 21F-17 and notified them of their right to communicate with the SEC.

Retaining Experienced SEC Whistleblower Attorneys

SEC whistleblowers help everyone by notifying the SEC of conduct that harms the investing public, while also earning financial compensation for themselves. Hiring experienced SEC counsel may greatly increase the probability that the SEC will initiate an investigation based on your information. If you wish to remain anonymous, you must be represented by an attorney, who will submit everything on your behalf.

Silver Law Group and the Law Firm of David R. Chase jointly have experienced SEC whistleblower lawyers, including a former SEC Enforcement attorney on the team, so you will always have guidance throughout the process. Our SEC whistleblower attorneys can help you if you have information regarding securities or investment fraud, violations of federal securities laws, false filings, market manipulation, or other misconduct. You must provide timely, credible, and original information or analysis to be eligible.

Contact us through our online form or at (800) 975-4345 for a consultation. Our attorneys work on a contingency fee basis. This means that it costs you nothing to hire us, and we collect our fees only if you receive an SEC bounty. Because we get paid when you do, we have the incentive to help you collect the maximum award available.

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