F-Squared Admits Wrongdoing, Pays $35M To Address SEC Fraud Charges

The investment management firm F-Squared has been ordered to pay $35 million in fines for defrauding investors about its performance history, going as far as to give performance records for years before the company even existed. 

On December 22, the U.S. Securities and Exchange Commission (SEC) announced that it was charging F-Squared Investments with making false performance claims, and that the company had already agreed to settle the charges and admitted to fraud.

According to the SEC, F-Squared has been telling clients and prospective investors that its performance history outperformed the S&P 500 from 2001 to 2008. That is problematic, since F-Squared did not start advising clients until 2009.

Investigators say that what the company did was used a backward-looking model based on its investing strategy, which showed how the company might have performed in the past, if it had actually existed. However, not only did the company not tell customers these numbers were hypothetical, but it inflated these numbers as well, the SEC charged. The SEC calculates that the company inflated the hypothetical results by about 350%.

“Investors must be able to trust that performance advertisements are accurate,” SEC Enforcement Division Director Andrew Ceresney said in a press release announcing the charges. “F-Squared has admitted that it misled its clients over a number of years about the existence and success of its core strategy.”

The SEC complaint was filed in federal court in Boston against F-Squared founder and former CEO Howard Present, saying he made false and misleading statements when he worked as the face of F-Squared. The SEC says Present was responsible for advertising materials and descriptions of its AlphaSector premium index.

An analyst explained the problems with the model’s claims as early as September 2008, but the company continued to falsely advertise the hypothetical and inflated results for another five years, the SEC claims.

F-Squared has consented to orders finding that it violated a number of investment laws and has agreed to pay $35 million to settle the charges. The SEC investigation is ongoing.