AlphaSector

Judge Says Ex-F-Squared CEO Must Pay More Than $13M Related to AlphaSector Strategy and ETF Fraud

Published on: March 22, 2018 | by Shepherd Smith Edwards & Kantas, LLP

Howard Present, the ex-CEO and cofounder of F-Squared Investments, must pay more than $13M—nearly $11M of disgorgement, almost $1.4M of interest and a nearly $1.6M penalty. The final judgement, issued by U.S. District Judge Leo Sorokin in Boston, comes after a federal jury found Present liable for the false and misleading statements made to investors.

It was in 2014 that the US Securities and Exchange Commission charged Present and his investment management firm with misleading investors about its AlphaSector strategy. At the time, F-Squared was the biggest market of index products that use exchange-traded funds.

The SEC accused F-Squared of false advertising related to its touting of a “successful seven-year track records” for its AlphaSector strategy that it claimed was based on real investments, real clients, and real performances, when, in fact, the algorithm that the company claimed to use didn’t even exist during that time period of this supposed success. Instead, the data that the F-Squared marketed was a product of backtesting—not real testing—even though Present and his firm specifically stated that their AlphaSector strategy had not been backtested.

Ex-F-Squared CEO on Trial Against SEC in Exchange-Traded Fund Fraud Case

Published on: September 11, 2017 | by Shepherd Smith Edwards & Kantas, LLP

In federal court in Boston, Howard Present, the former CEO and co-founder of F-Squared Investments Inc. is on trial over civil exchange-traded fund fraud charges brought against him by the US Securities and Exchange Commission. Present is accused of lying about the firm’s flagship product, the AlphaSector model portfolio, to investors and making millions of dollars in the process.

According to the regulator, starting in 2008, Present touted the AlphaSector as having a successful track record going as far back as 2001. F-Squared claimed that this performance was based on a strategy developed by a multibillion dollar wealth manager when, in reality, it was based on an algorithm that had been applied to historical market information by the manager’s intern, who was a college student at a time. Also, the track record was hypothetical and not historical.

The regulator believes that there was a mistake in the hypothetical figures that caused a substantial inflation of investment performance that was used when creating marketing materials for the AlphaSector. The DEC contends that even though Present knew about the inaccuracies, he did not order a correction and continued to use the inflated performance numbers.

When F-Squared started marketing the strategy to possible clients, rather than stating that the potential performance of the strategy was set up in 2008, Present claimed that actual investment history had been used calculate the track record. A press release was even issued claiming that $100M in client money had been dedicated to the investment strategy for the past several years when the actual monetary figure for that was zero.

Virtus Investment Advisers to Pay $16.5M to Settle False Performances Claims Related to ETF Portfolio Strategy

Published on: November 16, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission says that Virtus Investment Advisers will pay $16.5M to resolve charges accusing the investment management firm of misleading mutual fund investors and others using ads with false historical performance information about exchange-traded fund portfolio strategy AlphaSector. According to the regulator, the firm publicized a performance track record that it got from F-Squared that was substantially overstated. Virtus had hired F-Squared as a mutual fund subadvisor as well as a subadvisor for those that followed AlphaSector.

The SEC, following its probe, said that Virtus falsely stated in SEC filings, client presentations, marketing collateral, and other communications that the AlphaSector’s strategy had a performance history going as far back as 2001 and had for a number years outperformed the S & P 500 Index. The investment management firm is accused of accepting F-Squared’s misrepresentations as fact while disregarding the red flags that raised doubts about these statements.

Six years ago Virtus recommended that shareholders of specific mutual funds and the boards of trustees approve a modification in strategy and management to AlphaSector and F-Squared. This recommendation was made because of the false historical data on AlphaSector.