F-Squared ordered pay $35 mill by SEC for misleading investors

The United States Securities and Exchange Commission (SEC) has ordered F-Squared Investments Inc. the largest U.S. exchange traded funds (ETF) strategist to pay $35 million to settle charges it made false claims about the performance of its flagship investment product.

The SEC had charged F-Squared with touting a seven-year track record in its AlphaSector strategy that was not based on strategies connected to real money, as well as with using faulty calculations to inflate results. F-Squared reported $25 billion in ETF-managed-portfolio assets as of September, according to Morningstar Inc. AlphaSector grew to become one of the most popular  ETF strategies with portfolio managers, who used the funds as building blocks and often promoted them as mitigating the risks of a stock market rout after the 2008 financial crisis.

F-Squared, which also manages a suite of five mutual funds for Virtus Investment Partners Inc., agreed to retain for an additional nine months a compliance consultant hired earlier this year. Virtus (VRTS) shares rose 1.57% in afternoon trading Monday.

F-Squared represented the investment strategy as one used to manage assets from April 2001, says the SEC, when the algorithm used to make trading decisions actually was not finalized until 2008. The numbers used were hypothetical, or “back tested.” And the analyst responsible for calculating the performance mistakenly applied buy and sell signals to the week before the price changes on which the signals were based, “enabling the model to buy an ETF just before the price rose and sell an ETF just before the price fell,” the SEC said. The SEC said that after the analyst “tried to explain” the error to Mr. Present in 2008, F-Squared continued to advertise the false data for five years, representing the strategy’s significant outperformance of the S&P 500 index from April 2001 to Sept. 2008.

The SEC said it is continuing its investigation.

Jeffrey Newman represents whistleblowers