WASHINGTON – Investment firm F-Squared will pay $35 million and admit wrongdoing to settle federal regulators’ charges that it defrauded investors with false advertising claims about financial performance.
The Securities and Exchange Commission announced the settlement Monday with F-Squared Investments Inc., the largest U.S. marketer of index products using exchange-traded funds. ETFs trade like stocks but mirror other assets such as stock indexes or commodities. They offer the ability to move in and out of markets and have become popular among retail investors in recent years.
The SEC said F-Squared, which is based in Wellesley, Massachusetts, falsely advertised a successful seven-year track record for its “AlphaSector” index product, which later became its biggest revenue source and turned the firm from posting losses to being highly profitable.
In fact, the algorithm on which trading for the product was based didn’t exist during the seven-year period from 2001 to 2008, according to the SEC. The agency said F-Squared made the false statements about AlphaSector, in advertising on its website and sent to clients and prospective investors, from September 2008 to September 2013.
As of June 30, about $28.5 billion was invested in products tied to AlphaSector, according to the SEC.
“Investors must be able to trust that performance advertisements are accurate,” SEC Enforcement Director Andrew Ceresney said in a statement. “F-Squared has admitted that it misled its clients over a number of years about the existence and success of its core strategy.”
Separately, the SEC accused F-Squared’s co-founder and former CEO Howard Present in a lawsuit of making false and misleading statements to investors, saying he was responsible for the advertising. An attorney representing Present didn’t immediately return telephone calls seeking comment. Present left the firm this year.
F-Squared is paying the government $30 million in restitution and a $5 million penalty under the settlement. The firm agreed to admit wrongdoing, to refrain from future violations of the securities laws, and to hire an independent compliance consultant.
An admission of wrongdoing in an SEC settlement by a company or individual is fairly rare and is deemed to indicate serious harm to investors. Of scores of settlements reached by the agency since a new policy allowing for admissions of wrongdoing came into effect in mid-2013, only about a dozen called for them.
F-Squared CEO Laura Dagan said the firm was pleased to resolve the case.
“We greatly appreciate the continued support of our clients who have maintained confidence in F-Squared’s ability to deliver downside protection in down markets and upside participation in rising markets,” Dagan said in a statement.
F-Squared said it voluntarily hired an independent compliance consultant early this year and will retain its services for an additional nine months.