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

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.

Also, the hypothetical formation used had a calculation mistake that ended up inflating the outcomes by about 350%. Not only that, said the SEC, but the algorithm was created by a college student at another firm and was not developed by a wealth manager supposedly in charge of billions of dollars, as touted.

The SEC said that even after Present found out about the inflated performance figures, the data was not removed or corrected. Instead, the information remained in marketing collaterals that he authored. The jury ruled that Present violated the Investment Advisers Act.

F-Squared has since admitted to wrongdoing and consented to pay $35M to resolve the SEC’s case. It filed for bankruptcy protection in 2015.

Now, the final judgment in Present’s case permanently enjoins him from violating certain sections of the Investment Advisers Act of 1940 and from aiding and abetting violations of the Advisers Act, Section 206. Judge Sorkin found that Present still does not recognize the harm he created with his “reckless” actions and false statements that drew in investors. Present maintains that he did nothing wrong.

If you are an investor who has lost money in exchange-traded funds and you believe that fraud, negligence, or other wrongdoing may be the reason, contact our ETF fund fraud lawyers at The SSEK Partners Group today.

SEC Complaint in the Present Case (PDF)

Court Orders Former F-Squared CEO to Pay Over $13 Million, SEC, March 22, 2018

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