Our financial advisor malpractice team is now accepting cases for review involving thirteen investment advisory firms penalized by the Securities and Exchange Commission (SEC). These firms provided customers with false information about AlphaSector Index Funds, a series of products designed by defunct investment manager F-Squared Investments and its former CEO Howard Present.
F-Squared’s False Reporting of Success
F-Squared, which called itself a “tactical ETF manager,” used sophisticated computer models to advise clients on when to buy and sell exchange-traded funds (“ETFs). The strategy purportedly followed an algorithm that yielded a signal indicating whether to buy or sell nine industry ETFs that together made up the industries in the S&P 500 Index. The SEC alleged that:
[W]hile marketing AlphaSector into the largest active ETF strategy in the market, F-Squared falsely advertised a successful seven-year track record for the investment strategy based on the actual performance of real investments for real clients. In reality, the algorithm was not even in existence during the seven years of purported performance success. The data used in F-Squared’s advertising was actually derived through backtesting, which is the application of a quantitative model to historical market data to generate a hypothetical performance during a prior period. F-Squared and [CEO Howard] Present specifically advertised the investment strategy as ‘not backtested.’ Furthermore, the hypothetical data contained a substantial performance calculation error that inflated the results by approximately 350 percent.
F-Squared Investments settled the charges with the SEC, admitted wrongdoing, and paid the SEC a fine of $35 million.
Firms Didn’t Perform Due Diligence
F-Squared gave each of the thirteen investment advisory firms inaccurate data regarding the performance of its AlphaSector strategy. Each firm, in turn, offered the AlphaSector strategy to its clients. In so doing, the firms passed the false information on to their clients. The SEC fined the firms because none of them performed adequate due diligence to independently verify whether the representations they were making were accurate.
The 13 firms that relied on F-Squared Investments’ representations without verification were:
- AssetMark
- BB&T Securities
- Banyan Partners
- Congress Wealth Management
- Constellation Wealth Advisors
- Executive Monetary Management
- HT Partners
- Hilliard Lyons
- Ladenburg Thalmann Asset Management
- Prospera Financial Services
- Risk Paradigm Group
- Schneider Downs Wealth Management Advisors
- Shamrock Asset Management
The above list may grow to encompass other firms as the SEC investigation is continuing. In discussing this case, the SEC described investment advisory firms’ obligations to their clients with regard to providing investment recommendations:
“When an investment adviser echoes another firm’s performance claims in its own advertisements, it must verify the information first rather than merely accept it as fact,” said Andrew J. Ceresney, Director of the SEC Enforcement Division. “These advisers negligently passed many of F-Squared’s claims onto their own clients, who were consequently relying upon false and misleading information when making investment decisions.” Anthony S. Kelly, Co-Chief of the SEC Enforcement Division’s Asset Management Unit, added, “The Asset Management Unit continues to investigate and pursue similar enforcement actions against other advisers that potentially misled investors and others with advertisements containing F-Squared’s false historical performance data.”
If you invested in F-Squared’s AlphaSector ETFs, contact us now. We’ll examine your records and advise you as to whether you have been subjected to misconduct. And if we determine that misconduct produced losses in your investment portfolio, we can help to recover some or all of those losses. Contact attorney Hugh Berkson at (866) 932-1295 for a free evaluation of your recovery options. You can also send an email to hdb@mccarthylebit.com or reach us by filling out the form to the right
Hugh Berkson is a Securities Attorney with McCarthy, Lebit, Crystal & Liffman, Co. LPA. Hugh is rated AV® Preeminent™ by Martindale-Hubbell®.
He obtained a business degree in Finance from the University of Texas at Austin in 1989, and is a 1994 graduate of Case Western Reserve University School of Law, where he was a member of the Order of the Barristers and received both the American Jurisprudence Award, (National Mock Trial) in 1993 and the Jonathan M. Ault Mock Trial Prize for 1993-1994.
