The Securities and Exchange Commission today announced that a Hartford, Conn.-based investment management firm agreed to pay $16.5 million to settle charges that it misled mutual fund investors and others with advertisements containing false historical performance data about AlphaSector, a major exchange-traded fund (ETF) portfolio strategy.
An SEC investigation found that Virtus Investment Advisers publicized a substantially overstated performance track record as received from F-Squared, which it hired as a subadviser for mutual funds and other clients that followed F-Squared’s AlphaSector strategy. Virtus falsely stated in client presentations, marketing materials, SEC filings, and other communications that the AlphaSector strategy had a performance history dating back to April 2001 and outperformed the S&P 500 Index for several years. In a separate SEC enforcement action last year, F-Squared admitted to touting a track record it presented as real when it was actually hypothetical and backtested, and these calculations also were inflated.
“Virtus accepted F-Squared’s historical performance misrepresentations at face value and ignored red flags that called these statements into question,” said Andrew J. Ceresney, Director of the SEC Enforcement Division. “If an investment adviser chooses to advertise, it is responsible for the content and accuracy of its ads.”
Julie M. Riewe, Co-Chief of the SEC Enforcement Division’s Asset Management Unit, added, “By failing to take steps to verify F-Squared’s claims, Virtus solicited investors using materially false and misleading AlphaSector performance data.”
According to the SEC’s order instituting a settled administrative proceeding:
- F-Squared admitted in a separate SEC settled administrative proceeding that no F-Squared or other client assets had tracked the strategy from April 2001 to September 2008. F-Squared also admitted that it miscalculated the historical performance of AlphaSector during that time by incorrectly implementing signals earlier than they actually could have occurred.
- In 2009, Virtus recommended that the boards of trustees and shareholders of certain Virtus mutual funds approve a change in management and strategy to F-Squared and AlphaSector. They did so based in part on AlphaSector’s false historical performance.
- Virtus failed to take steps to determine whether F-Squared’s buy or sell signals were generated or used in any trading decisions from April 2001 to September 2008.
- Even though Virtus expressed skepticism at the outset of the potential relationship with F-Squared about AlphaSector’s so-called “live” track record, it did not adequately investigate concerns about the representations being made.
- Virtus had no records to support the calculation of the historical AlphaSector strategy track records that it then advertised.
- During the period in which Virtus used the false and misleading advertisements, its AlphaSector funds’ assets under management grew from $191 million at the end of 2009 to approximately $11.5 billion by 2013.
Virtus consented to the entry of the order finding that it violated Sections 204, 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rules 204-2(a)(16), 206(4)-1(a)(5), 206(4)-7, and 206(4)-8. The order also finds that Virtus caused certain mutual funds that it advised to violate Section 34(b) of the Investment Company Act of 1940. Without admitting or denying the findings, Virtus agreed to pay $13.4 million in disgorgement, $1.1 million in prejudgment interest, and a $2 million penalty.
The SEC’s investigation of F-Squared and Virtus was conducted by Corey Schuster, William Donahue, Jose Santillan, and John Farinacci of the Asset Management Unit as well as Jennifer Cardello, Rachel Hershfang, Rory Alex, and Frank Huntington of the Boston Regional Office. The investigation was supervised by Jeffrey Finnell and Robert Baker. The SEC continues to investigate the conduct of other advisers that potentially misled investors and others with advertisements containing F-Squared’s false historical performance data.