BOSTON (Reuters) - The former chief executive of F-Squared Investments Inc, once the largest U.S. money manager creating portfolios out of exchange-traded funds, went to trial on Monday on charges by the top U.S. securities regulator that he misled investors.
A 12-person jury was selected to hear evidence presented in federal court in Boston in a lawsuit the U.S. Securities and Exchange Commission filed in 2014 against Howard Present, the co-founder of Wellesley, Massachusetts-based F-Squared.
The SEC filed the lawsuit the same day it announced F-Squared had agreed to pay $35 million and admit wrongdoing to resolve claims it misled investors by falsely advertising the performance of an investment product dubbed “AlphaSector.”
F-Squared later filed for bankruptcy in 2015. Present denies wrongdoing, and his lawyers say the statements he made about AlphaSector were correct or made in good faith.
The SEC alleges that beginning in September 2008, Present began marketing AlphaSector as having a successful record dating back to 2001 that was based on a multibillion-dollar wealth manager’s strategy.
In truth, the data F-Squared used to market AlphaSector was based on an algorithm developed by a college student at a nearby firm and was applied to historical market data, resulting in a hypothetical performance, the SEC said.
The SEC also said an F-Squared analyst who calculated the hypothetical numbers made a mistake in the process that substantially inflated the investment performance that appeared in marketing materials Present wrote.
Despite learning about the error, Present did not tell the analyst to correct it and continued using the inflated performance figures, the SEC said.
On the success of AlphaSector, F-Squared became one of the largest U.S. firms of its kind, with more than $28 million invested with it, and Present made millions of dollars, the SEC said.
Lawyers for Present counter that F-Squared made clear that AlphaSector was “based upon” a strategy in use with client assets since 2001 but that it did not represent the actual investment performance.
They also said Present relied on lawyers to ensure that F-Squared’s marketing materials complied with the law.
Should the jury find Present liable, the SEC has said it will ask U.S. District Judge Leo Sorokin to impose an injunction and order Present to forfeit earnings and pay penalties in an amount 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