Yesterday, the SEC announced an interesting enforcement action against investment management firm F-Squared Investments and its former CEO, Howard Present. According to the SEC, F-Squared misled investors between September 2008 and September 2013 by touting a lengthy record of stellar performance that was, in fact, not only hypothetical but substantially inflated.

Specifically, the SEC alleges, F-Squared falsely advertised a successful seven-year track record for a particular investment strategy

based on the actual performance of real investments for real clients.  In reality, the algorithm was not even in existence during the seven years of purported performance success.  The data used in F-Squared’s advertising was actually derived through backtesting, which is the application of a quantitative model to historical market data to generate a hypothetical performance during a prior period.  F-Squared and Present specifically advertised the investment strategy as “not backtested.”  Furthermore, the hypothetical data contained a substantial performance calculation error that inflated the results by approximately 350 percent.

F-Squared has agreed to settle the SEC's case against it. As part of the settlement, F-Squared will admit the SEC's allegations that it misled its clients through such advertising and pay disgorgement of $30 million and a penalty of $5 million. 


The SEC also sued Present, the former CEO, for his role in the alleged false statements to investors. Present did not settle the SEC's claims against him, which his attorneys, Brendan Sullivan and David Zinn of law firm Williams & Connolly, called “misdirected and meritless.” Sullivan and Zinn noted that the SEC does not allege that investors lost money and also that "there is no allegation questioning the company’s investment performance over the past six years.”


On the F-Squared website, its CEO, Laura Dagan, currently appears in a video announcing the settlement and noting that it marks a "new chapter" for the company. In the video, Dagan states that F-Squared has evolved dramatically since 2008 and now has a strong culture of compliance that is "best in class."