Securities Lawyers Blog
The Securities and Exchange Commission (SEC) fined firm F-Squared Investments $35 million while admitting wrongdoing to settle charges that it defrauded investors through false performance advertising about its flagship product. As we previously reported, shares of mutual fund provider Virtus Investment Partners Inc. (Virtus Investment) tanked on news that the SEC was close to recommending charges against F-Squared a sub-adviser on the Virtus funds. F-Squared –builds mutual fund portfolios consisting of exchange traded funds (ETFs) for the Virtus mutual funds.
According to the SEC’s order, F-Squared, the largest marketer of index products using ETFs, the firm began receiving signals from a third-party data provider in September 2008 indicating when to buy or sell an investment. The SEC alleged that the signals were based on an algorithm and F-Squared used the signals to create a model portfolio of sector ETFs that could be rebalanced periodically as the signals changed. The new product “AlphaSector” launched the first index shortly thereafter. AlphaSector’s indexes became the firm’s largest revenue source.
The SEC alleged that the marketing of AlphaSector into the largest active ETF strategy in the market was based upon false information concerning F-Squared’s successful seven-year track record. According to the information provided, the marketing materials were supposed to be based on the actual performance of real investments for real clients. But in reality, the SEC found that the algorithm was not in existence during the seven years of the advertised performance success. Instead, the SEC found that F-Squared’s advertising was actually derived through backtesting to historical market data generating a hypothetical performance during a prior period.