In federal court in Boston, Howard Present, the former CEO and co-founder of F-Squared Investments Inc. is on trial over civil exchange-traded fund fraud charges brought against him by the US Securities and Exchange Commission. Present is accused of lying about the firm’s flagship product, the AlphaSector model portfolio, to investors and making millions of dollars in the process.
According to the regulator, starting in 2008, Present touted the AlphaSector as having a successful track record going as far back as 2001. F-Squared claimed that this performance was based on a strategy developed by a multibillion dollar wealth manager when, in reality, it was based on an algorithm that had been applied to historical market information by the manager’s intern, who was a college student at a time. Also, the track record was hypothetical and not historical.
The regulator believes that there was a mistake in the hypothetical figures that caused a substantial inflation of investment performance that was used when creating marketing materials for the AlphaSector. The DEC contends that even though Present knew about the inaccuracies, he did not order a correction and continued to use the inflated performance numbers.
When F-Squared started marketing the strategy to possible clients, rather than stating that the potential performance of the strategy was set up in 2008, Present claimed that actual investment history had been used calculate the track record. A press release was even issued claiming that $100M in client money had been dedicated to the investment strategy for the past several years when the actual monetary figure for that was zero.