F-Squared Investments will pay $35 million and admit wrongdoing to settle SEC charges of defrauding investors with false performance advertising of its flagship strategy, “AlphaSector,” an active ETF strategy.
Securities and Exchange Commission officials announced the charges and settlement Monday. F-Squared will pay a $5 million civil penalty and disgorge $30 million in profits to settle the administrative proceedings.
The SEC also filed charges in U.S. District Court in Boston against F-Squared’s co-founder and former CEO Howard Present for making false statements to investors and in SEC filings, after settlement talks with him failed, SEC Enforcement Division Director Andrew Ceresney said during a news conference call. “We allege that Mr. Present intentionally or recklessly misled investors,” Mr. Ceresney said. He characterized the investigation as an investment adviser performance advertising case, which is an SEC priority.
According to SEC officials, F-Squared, which has $28 billion in assets under management, falsely advertised a successful seven-year track record for AlphaSector, which is based on an algorithm relying on rebalancing signals from a third-party data provider. The algorithm did not exist when the strategy was launched in 2008; instead, the firm’s advertising data was derived through back-testing that generated a hypothetical performance for the portfolio to 2001, an SEC statement said. The hypothetical data also miscalculated performance and inflated results by about 350%, Mr. Ceresney said.
Marketing materials and Mr. Present had said the strategy was “not back-tested,” the SEC statement said.
In a video message on the firm’s website, F-Squared CEO Laura Dagan said, “We … have evolved substantially since 2008 when F-Squared was a six-person startup. Above all else, we have created a culture of compliance.” F-Squared will continue to retain the independent compliance consultant it voluntarily hired in early 2014 for another nine months.
“Today marks a new chapter,” Ms. Dagan said. “We are pleased to put this matter behind us so that we can focus on our clients and continue to invest to ensure that our compliance, research, analytics and operational teams are best-in-class.”
