Howard B. Present “acted in good faith” when he led F-Squared Investments Inc., the firm that said it misled clients about its investing track record during his tenure, lawyers for the former executive said in court filings Monday.
“Any alleged misrepresentations or allegedly false or misleading statements or omissions … were inadvertent and unintentional,” Mr. Present's lawyers wrote.
They said the F-Squared co-founder,
who resigned in November, “reasonably relied upon the work, advice, professional judgment, and opinions of others, including but not limited to legal and compliance professionals, upon which Mr. Present was entitled to rely.”
F-Squared, the largest ETF-based portfolio strategist, routinely promoted seven years of pre-2008 results for its “AlphaSector” indexes, despite launching the product that year. In fact, those results were hypothetical and miscalculated in a way that made them look more favorable, according to recent statements by the firm.
Late last year, the firm
agreed to pay $35 million to settle charges by the Securities and Exchange Commission regarding false performance claims.
Since then, Wellesley, Mass.-based F-Squared has reorganized its leadership under new CEO Laura P. Dagan and worked to retain the business of financial advisers and institutions who invested clients' money directly through the firm, as well as through mutual funds sold by Virtus Investment Partners Inc. It
cut 25% of its workforce, about 40 people, last week, citing an analysis of the firm's current needs.
Now, the SEC is attempting to claw back some of the millions of dollars Mr. Present earned and may also try to bar him from the industry.
F-Squared's claim that its rules-based strategy could sidestep violent market swings — by opportunistically trading in and out of industrial-sector ETFs — appealed to advisers stung by the 2008 free-fall of stock markets.
The firm built itself from a virtual nonentity in 2008 to the force behind a $28.5 billion strategy, as of last June.
F-Squared indexes were responsible for assets totaling $21.8 billion in late December, shortly after the SEC charges were announced, the most recent figure available, according to Morningstar Inc.
As the F-Squared's “public face,” Mr. Present made “false and misleading statements,” the SEC said in December when it
released a lengthy summary of its allegations.
In a point-by-point rebuttal, Mr. Present's lawyers said the SEC's claims were “vague, ambiguous and confusing.”
“Mr. Present's alleged conduct did not cause loss or harm to anyone,” according to the response signed by lawyers at the Washington firm Williams & Connolly and the Boston firm Foley & Lardner.
The SEC did not immediately respond to a request for comment sent by e-mail after normal working hours Monday.
F-Squared reported the discrepancies to clients and adjusted its marketing materials after the SEC launched an investigation in 2013. The track record of products it actually manages have not been called into question.
