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Regulation and Compliance > Federal Regulation > SEC

SEC Fines Virtus $16.5M for Failing to Probe F-Squared’s False Performance Claims

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The SEC has fined Virtus Investment Advisers, a subsidiary of publicly traded Virtus Investment Partners (VRTS), $16.5 million for advertising false performance data about the AlphaSector ETF portfolio strategy. 

The AlphaSector strategy was managed by F-Squared, a subadvisor for Virtus that itself was fined $35 million late last year for misleading performance advertising and which filed for bankruptcy in July.

The SEC said that during the time that Virtus used the false and misleading ads, its Alpha Sector fund assets grew from $191 million at year-end 2009 to $11.56 billion by 2013.

“Virtus accepted F-Squared’s historical performance misrepresentations at face value and ignored red flags that called these statements into question,” said Andrew Ceresney, director of the SEC Enforcement Division, in a statement.

According to the SEC’s previous charges, F-Squared and its CEO, Howard Present, advertised a seven-year track record, from April 2001 to September 2008, that they said were based on the actual performance of client assets and not a backtest, The opposite was true, according to the SEC.

In addition, the SEC charged that not only did F-Squared use an algorithm of buy and sell signals that had not been in existence previously but also the buy and sell signals predated the ETF price changes that caused the change in the signals. 

F-Squared admitted it had miscalculated the historical performance of AlphaSector.

In Monday’s filing, the SEC noted, “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.” By failing to do so, “Virtus solicited investors using materially false and misleading AlphaSector performance data,” said Julie Riewe, co-chief of the SEC Enforcement Divisions’ Asset Management Unit.

Virtus Investment Partners Inc, which oversees the mutual funds, did not admit or deny the SEC’s findings. It agreed to pay $13.4 million in disgorgements, $1.1 million in prejudgment interest and a $2 million penalty.

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