March 20, 2018 / 4:35 PM / in a month

Former F-Squared CEO must pay $12.4 million in SEC case: U.S. judge

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, must pay more than $12.4 million for making false statements to investors, a federal judge ruled on Tuesday.

FILE PHOTO: Former F-Squared Investments Inc CEO Howard Present (center), arrives at the federal court in Boston, Massachusetts, U.S. September 7, 2017. REUTERS/Nate Raymond

U.S. District Judge Leo Sorokin in Boston issued the order after a federal jury in October found former F-Squared CEO Howard Present liable in a lawsuit brought by the U.S. Securities and Exchange Commission.

Sorokin said Present had failed to recognize the harm he caused by recklessly making false statements that lured investors seeking to avoid market declines after the 2008 financial crisis.

“Present was reckless, his conduct was repeated, and he has never meaningfully acknowledged or appreciated his own misconduct,” Sorokin wrote.

The judge ordered Present to disgorge more than $10.85 million in earnings and pay a nearly $1.56 million civil penalty. Sorokin also said an injunction was needed to ensure Present did not engage in future violations given his “egregious” conduct.

A lawyer for Present did not respond to requests for comment. Present, the co-founder of Wellesley, Massachusetts-based F-Squared, has denied wrongdoing.

The SEC sued Present in 2014 on 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 called AlphaSector.

At its height, F-Squared was one of the largest U.S. firms of its kind, with more than $28 billion invested with it, the SEC said. It filed for bankruptcy in 2015.

According to the SEC, beginning in September 2008 amid the economic crisis, 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.

Following a four-week trial, a jury on October found that Present intentionally or recklessly violated the Investment Advisers Act.

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 Tom Brown

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