F-squared investments was an investment management firm that marketed index-tracking exchange-traded funds (ETFs). However, the company engaged in fraudulent activities by falsely advertising its flagship AlphaSector index series. The SEC charged F-squared with making false performance claims about the AlphaSector indexes. F-squared agreed to pay $35 million to settle the charges. The SEC also charged 13 investment advisors who falsely claimed investment returns were based on the historical performance of the AlphaSector indexes. The cases highlighted the importance of verifying performance claims and conducting proper due diligence.
F-squared falsely claimed AlphaSector indexes had a live track record before launch
F-squared launched its AlphaSector strategy in 2008. However, it misled investors by presenting a hypothetical historical track record showing the strategy significantly outperformed the S&P 500 index for the period 2001 to 2008. In reality, the track record was back-tested using ETF performance data rather than live assets. The false advertising helped F-squared gather over $28 billion in investor assets at its peak before the SEC investigated the misconduct.
F-squared agreed to pay $35 million to settle SEC charges
In December 2014, the SEC charged F-squared with making false performance claims about its AlphaSector indexes. F-squared agreed to pay $30 million in disgorgement and a $5 million penalty to settle the charges. The company admitted that it falsely advertised AlphaSector’s historical performance. F-squared continued using the false advertising for more than three years after launching the AlphaSector strategy.
SEC charged advisors for using F-squared’s false advertisements
Apart from charging F-squared, the SEC also took enforcement actions against 13 investment advisors who used F-squared’s false advertisements about AlphaSector performance. Between 2012 and 2015, the SEC charged these advisors with violations arising from negligent use of the false AlphaSector track record in their own performance advertising. Most advisors agreed to settle the charges by paying fines ranging from $100,000 to over $1 million.
The case highlighted the need for proper due diligence
The F-squared case highlighted the importance of verifying performance claims instead of blindly relying on advertisements. Investment managers have a responsibility to perform proper due diligence instead of passing on questionable information to clients. The case showed that improper advertising can have major consequences even if advisors act negligently instead of intentionally. This emphasizes the need for maintaining high compliance standards when advertising investment products and services.
F-squared investments falsely claimed its AlphaSector indexes had a live performance track record before the strategy’s 2008 launch. The SEC charged the company with securities fraud and F-squared paid $35 million to settle. The SEC also took enforcement actions against advisors who used F-squared’s false advertising, emphasizing the need for proper due diligence.