SEC Settles Charges for False Mutual Fund Performance Claims

Investing

Published: November 16, 2015 1:50 pm

Last Updated: January 13, 2020 5:08 pm

The U.S. Securities and Exchange Commission (SEC) reported that a Connecticut-based investment management firm agreed to pay $16.5 million in an effort to settle charges from a recent SEC investigation. These charges were regarding allegations 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.

The company 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. While 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 back-tested, and these calculations also were inflated.

It’s worth noting that 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.

Andrew J. Ceresney, director of the SEC Enforcement Division, said:

Virtus accepted F-Squared’s historical performance misrepresentations at face value and ignored red flags that called these statements into question. 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.

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