F-Squared Investments agreed to pay $35 million in penalty to settle the case filed against it by the Securities and Exchange Commission (SEC) on allegations that it committed fraud by making false performance claims to investors. The investment management firm also admitted its wrong doing.
F-Squared Investments is the largest marketer of index products using exchange- traded funds (ETFs).
SEC Director of Enforcement Division, Andrew Ceresney said, “Investors must be able to trust that performance advertisements are accurate. F -Squared has admitted that it misled its clients over a number of years about the existence and success of its core strategy.”
Details of the settlement
Under the agreement, F-Squared Investments will pay $5 million in civil penalty and disgorge $30 million in profits to resolve the charges of the SEC. The firm also agreed to retain the services of an independent compliance consultant for additional nine months. The firm hired the consultant in the beginning of this year.
In a statement, Laura Dagan, the newly appointed CEO of F-Squared Investments 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.”
Dagan also expressed appreciation to their clients who maintained their confidence on the ability of F-Squared Investments to deliver downside protection in down markets and upside participation in rising markets.
F-Squared falsely advertised AlphaSector’s performance
According to the SEC, F-Squared Investments falsely advertised a successful seven-year track record of its investment strategy called AlphaSector based on the actual performance of real investments for clients.
Alpha Sector is the largest revenue source of F-Squared Investments. The firm started receiving signals based on algorithms that indicate when to buy or sell an investment from a third-party on September 2008.
The SEC emphasized that the algorithm “was not even in existence during the seven years of purported performance success” of F-Squared Investments’ investment strategy.
“The data used in F-Squared’s advertising was actually derived through back testing, which is the application of a quantitative model to historical market data to generate a hypothetical performance during a prior period. F-Squared and Present specifically advertised the investment strategy as not back-tested. Furthermore, the hypothetical data contained a substantial performance calculation error that inflated the results by approximately 350 percent,” according to the commission.
The SEC filed a separate case against Howard Present, co-founder and former CEO of F-Squared Investments for making false and misleading statements to investors at the public face of the firm.