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Saturday, October 07, 2017

The Verdict Is In On F-Squared's Co-Founder

News summary by MFWire's editors

After a three-year fight and a four-week trial, the verdict is on the co-founder and former CEO of fallen ETF strategist giant F-Squared Investments.

Yesterday a jury found Howard Present "liable on all counts" in the SEC's securities fraud case against Present, SEC enforcement division co-director Stephanie Avakian confirmed last night in a statement. Avakian did not reveal what's next after the verdict, such as what kind of damages (if any) Present will be faced with.

A spokeswoman for Hogan Lovells, five of whose lawyers are defending Present, was not immediately able to comment. Spokespeople for the SEC and for U.S. District Judge Leo Sorokin, who presided over the case in the Boston branch of the U.S. District Court for the District of Massachusetts, did not immediately respond to calls for comment. An unnamed one of Present's attorneys declined to comment to Reuters.

The SEC's case against Present is all about F-Squared's performance reporting for its once-popular AlphaSector ETF strategies. To power those strategies, F-Squared bought data signals in 2008, and AlphaSector boomed. By fall 2008, the success of AlphaSectors (including a series of AlphaSector-powered mutual funds subadvised by F-Squared) had pushed F-Squared's AUM up to more than $25 billion, bigger than any other ETF strategist in the business.

Yet in August 2014 the SEC sent F-Squared a Wells notice over performance reporting issues. The SEC claimed that 1) F-Squared had marketed back-tested performance while claiming that it was real performance, and 2) that the back-tested performance that was mislabeled was also inflated.

In November 2014 Present was replaced as F-Squared's chief, and in December 2014 the SEC unveiled a $35-million settlement with the SEC while filing a 48-page complaint against Present. The SEC claimed that Present either knew or should have known that the performance reporting was both backtested and inflated.

Present didn't settle, instead demanding a jury trial. Meanwhile, F-Squared shrunk in late 2014 and early 2015, lost its mutual fund subadvisory mandate in May 2015, then filed for bankruptcy in July 2015. In September 2015 a competitor bought what was left of the once-highflying ETF strategist. 

Edited by: Neil Anderson, Managing Editor

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