Press Release Investment Advisers Paying Penalties for Advertising False Performance Claims FOR IMMEDIATE RELEASE 2016-167 Washington D.C., Aug. 25, 2016 — The Securities and Exchange Commission today announced penalties against 13 investment advisory firms found to have violated securities laws by spreading the false claims made by an investment management firm about its flagship product. An SEC enforcement sweep of investment advisers found that the 13 firms accepted and negligently relied upon claims by F-Squared Investments that its AlphaSector strategy for investing in exchange-traded funds (ETFs) had outperformed the S&P Index for several years. The firms repeated many of F-Squared’s claims while recommending the investment to their own clients without obtaining sufficient documentation to substantiate the information being advertised. F-Squared later admitted in an SEC enforcement case that what was purportedly its real, historical track record was only back-tested performance that turned out to be substantially inflated. The penalties assessed against the firms range from $100,000 to a half-million dollars based upon the fees each firm earned from AlphaSector-related strategies. “When an investment adviser echoes another firm’s performance claims in its own advertisements, it must verify the information first rather than merely accept it as fact,” said Andrew J. Ceresney, Director of the SEC Enforcement Division. “These advisers negligently passed many of F-Squared’s claims onto their own clients, who were consequently relying upon false and misleading information when making investment decisions.” Anthony S. Kelly, Co-Chief of the SEC Enforcement Division’s Asset Management Unit, added, “The Asset Management Unit continues to investigate and pursue similar enforcement actions against other advisers that potentially misled investors and others with advertisements containing F-Squared’s false historical performance data.” Without admitting or denying the findings, the 13 investment advisers consented to the entry of orders finding that they violated Sections 204 and 206(4) of the Investment Advisers Act of 1940 and Rules 204-2(a)(16) and 206(4)-1(a)(5). The SEC’s investigations have been conducted by Robert Baker, William Donahue, John Farinacci, Jeffrey Finnell, Corey Schuster, Naomi Sevilla, Rory Alex, Marc Jones, Alicia Reed, and Sonia Torrico. * * * SEC Orders and Penalties AssetMark – $500,000 BB&T Securities – $200,000 Banyan Partners – $200,000 Congress Wealth Management – $100,000 Constellation Wealth Advisors – $100,000 Executive Monetary Management – $100,000 HT Partners – $100,000 Hilliard Lyons – $200,000 Ladenburg Thalmann Asset Management – $200,000 Prospera Financial Services – $100,000 Risk Paradigm Group – $100,000 Schneider Downs Wealth Management Advisors – $100,000 Shamrock Asset Management – $200,000
Incredible. Haven't these guys ever heard of a simple strategy which doesn't require any backtesting or algorithms? It's called "buy the dip" lol! The investment advisors paid a small fine for their blind reliance on F-Squared results, however it seems F-Squared was the one faking the numbers, and hence paid the most fines. "F-Squared acknowledged that its conduct violated federal securities laws, and agreed to cease and desist from committing or causing violations of these provisions. F-Squared agreed to retain an independent compliance consultant and pay disgorgement of $30 million and a penalty of $5 million."
"F-Squared at least recklessly compiled the historical data to implement a hypothetical trade (that F-Squared advertised as an actual trade) one week before the trade could have occurred." Paragraph 2 above basically summarizes the scam, but if you want to read the full complaint, here's the link: https://www.sec.gov/litigation/admin/2014/ia-3988.pdf