On December 22, 2014, the SEC settled charges against investment advisory firm, F Squared Investments, Inc., in connection with false performance advertising of F Squared’s AlphaSector product. The SEC also charged the firm’s co-founder and former CEO, Howard Present, since according to the SEC, he was responsible for F Squared’s advertising materials and also certified the accuracy of filings regarding AlphaSector with the SEC.

According to the SEC’s order, F Squared advertised a seven-year track record for AlphaSector’s investment strategy using data derived through backtesting (i.e., applying a model to historical market data to generate hypothetical performance for prior periods), although F Squared advertised the investment strategy as “not backtested.” The SEC also alleged that the data used to calculate the track record contained a substantial performance calculation error that inflated the results by approximately 350%.

F Squared consented to the entry of the order finding that it violated various sections of the Advisers Act and the rules thereunder. The order also found that F Squared aided and abetted and caused certain mutual funds sub-advised by F Squared to violate Section 34(b) of the 1940 Act. F Squared agreed to retain an independent compliance consultant and pay disgorgement of $30 million and a penalty of $5 million.