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Investment firm paying $35m to settle SEC charges

SEC also charges cofounder of firm

A Wellesley firm called F-Squared Investments Inc. agreed to pay $35 million Monday to settle civil fraud charges brought by federal securities regulators that it misled investors about the performance of an index strategy that affected $28.5 billion in assets.

Separately, the Securities and Exchange Commission charged F-Squared’s cofounder and former chief executive, Howard B. Present, with making false and misleading statements to investors about the company’s strategy.

According to the SEC, F-Squared admitted it misled investors. The regulators alleged that the firm marketed its AlphaSector from September 2008 to September 2013 into the largest active exchange-traded fund strategy in the market, by falsely claiming to have a successful seven-year track record. In reality, the firm’s algorithm had not existed during those prior seven years.

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In addition, the SEC said, the hypothetical data used in AlphaSector contained a “substantial performance calculation error” that inflated results by 350 percent.

“We allege that not only did F-Squared and Present attract clients to this investment strategy by touting a track record they presented as real when it was merely hypothetical, but the hypothetical calculations also were substantially inflated,” said Julie M. Riewe, cochief of the SEC Enforcement Division’s Asset Management Unit.

SEC officials said investors did not lose money per se but were misled into investing with the promise of unrealistic returns. For instance, F-Squared advertised that an investor who put $100,000 into the firm’s hypothetical ETF sector rotation strategy on April 1, 2001, would have made $235,000, versus $128,000 for the Standard & Poor’s 500 index. The correct return, the SEC said, should have been $138,000.

F-Squared’s indexes are tracked by funds holding $28.5 billion, the SEC said. The firm is a sub-advisor on $13 billion in mutual fund assets.

A lawyer for Present, 53, of Wellesley, could not be reached for comment.

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Present was previously a managing director at two large Boston firms: Evergreen Investments, where he ran global product management and strategy, and Putnam Investments, according to public biographies. He started F-Squared in 2006. By July 2008, the company had not turned a profit; it had lost $609,000 and was struggling to meet payroll, the SEC said.

Present left F-Squared, where he is still an owner, in November. He could be barred from the industry if found guilty, the SEC said.


Beth Healy can be reached at beth.healy@globe.com. Follow her on Twitter @HealyBeth.