A Massachusetts-based investment management firm, F-Squared Investments, Inc., agreed to pay $35 million and admitted to wrong-doing based on SEC charges that it violated the anti-fraud provisions under the Investment Advisers Act by falsely reporting performance on its model portfolio. The firm’s CEO, Howard Present, was also charged by the SEC with making false and misleading statements to investors, but he has not agreed to a settlement with the SEC on those charges.
F-Squared is believed to be the nation’s largest marketer of index products using exchange-traded funds (ETFs). F-Squared created a model portfolio in 2008 based on trading signals received from a third party, which were based on an algorithm. The trading signals were for sector ETFs and were rebalanced from time to time as the signals changed. The new product, Alpha Sector, generally became the largest revenue producer for F-Squared and became the largest ETF strategy in the sector ETF market.
What got the firm in trouble is that it advertised the product as having a successful track record over seven years based on actual performance realized for client accounts. In reality, none of those statements were true, as the results in the strategy were over a lesser period, were “back tested,” and did not represent actual performance. In addition, the results reported were also inaccurate due to a substantial calculation error that resulted in an inflated number of about 350 percent.
According to the SEC, the firm’s CEO, Mr. Present, was responsible for the various false statements about the performance of the product over a period of about five years.
The firm, in settling the SEC’s allegations, admitted to violating the anti-fraud provisions of the Investment Advisers Act and caused violations of the Investment Company Act of 1940. In addition to paying the $35 million in disgorgement and penalties, the firm agreed to cease and desist from further violating the anti-fraud provisions and to retain an independent compliance consultant.