September 11, 2017
By Nate Raymond
BOSTON, Sept 11 (Reuters) - The former chief executive ofF-Squared Investments Inc, once the largest U.S. money managercreating portfolios out of exchange-traded funds, went to trialon Monday on charges by the top U.S. securities regulator thathe misled investors.
A 12-person jury was selected to hear evidence presented infederal court in Boston in a lawsuit the U.S. Securities andExchange Commission filed in 2014 against Howard Present, theco-founder of Wellesley, Massachusetts-based F-Squared.
The SEC filed the lawsuit the same day it announcedF-Squared had agreed to pay $35 million and admit wrongdoing toresolve claims it misled investors by falsely advertising theperformance of an investment product dubbed "AlphaSector."
F-Squared later filed for bankruptcy in 2015. Present denieswrongdoing, and his lawyers say the statements he made aboutAlphaSector were correct or made in good faith.
The SEC alleges that beginning in September 2008, Presentbegan marketing AlphaSector as having a successful record datingback to 2001 that was based on a multibillion-dollar wealthmanager's strategy.
In truth, the data F-Squared used to market AlphaSector wasbased on an algorithm developed by a college student at a nearbyfirm and was applied to historical market data, resulting in ahypothetical performance, the SEC said.
The SEC also said an F-Squared analyst who calculated thehypothetical numbers made a mistake in the process thatsubstantially inflated the investment performance that appearedin marketing materials Present wrote.
Despite learning about the error, Present did not tell theanalyst to correct it and continued using the inflatedperformance figures, the SEC said.
On the success of AlphaSector, F-Squared became one of thelargest U.S. firms of its kind, with more than $28 millioninvested with it, and Present made millions of dollars, the SECsaid.
Lawyers for Present counter that F-Squared made clear thatAlphaSector was "based upon" a strategy in use with clientassets since 2001 but that it did not represent the actualinvestment performance.
They also said Present relied on lawyers to ensure thatF-Squared's marketing materials complied with the law.
Should the jury find Present liable, the SEC has said itwill ask U.S. District Judge Leo Sorokin to impose an injunctionand order Present to forfeit earnings and pay penalties in anamount totalling at least $22.2 million.
Opening statements are expected on Tuesday.
The case is Securities and Exchange Commission v. Present,U.S. District Court, District of Massachusetts, No. 14-cv-14692.(Reporting by Nate Raymond in Boston; Editing by Matthew Lewis)
