13 Enforcement Actions Brought Against Several Advisers for Faulty Due Diligence of F-Squared’s Perf
13 enforcement actions brought against investment advisers involve F-Squared Investments, Inc. (“F-Squared”), an investment adviser that was registered with the SEC from March 2009 until January 2016, and is headquartered in Wellesley, Massachusetts. In October 2008, F-Squared launched its first AlphaSector index. F-Squared sub-licensed its approximately 75 AlphaSector indexes to unaffiliated advisers that managed assets pursuant to these indexes. On December 22, 2014, the SEC instituted a settled fraud action against F-Squared in which F-Squared admitted, among other things, to making the materially false claims that (a) the signals that formed the basis of the AlphaSector index returns had been used to manage client assets from April 2001 to September 2008; and (b) the signals resulted in a track record that significantly outperformed the S&P 500 Index from April 2001 to September 2008. See In the Matter of F-Squared Investments, Inc., Admin. Proceeding No. 3-16325 (Dec. 22, 2014).
In each of the enforcement actions brought against the advisers, the SEC found from different periods that the adviser, in reliance on F-Squared’s false statements, made false advertisements that the F-Squared AlphaSector strategy significantly outperformed the S&P 500 Index. In fact, the SEC found that no client assets had tracked the strategy. In addition, F-Squared miscalculated the historical performance of AlphaSector by incorrectly implementing signals in advance of when such signals actually could have occurred.
The SEC found that each adviser took insufficient steps to confirm the accuracy of F-Squared’s historical data and other information contained in the materials. In addition, the adviser did not obtain sufficient documentation that substantiated F-Squared’s advertising claims in the materials. As a result of this inaccurate compilation of historical data by F-Squared, the adviser advertised the AlphaSector strategy by using hypothetical and back-tested historical performance that was inflated substantially over what performance would have been if F- Squared had applied the signals accurately.
See, for example, Shamrock Asset Management, LLC, https://www.sec.gov/litigation/admin/2016/ia-4496.pdf for the enforcement action.