Virtus Investment Advisers to Pay $16.5M to Settle False Performances Claims Related to ETF Portfolio Strategy

The Securities and Exchange Commission says that Virtus Investment Advisers will pay $16.5M to resolve charges accusing the investment management firm of misleading mutual fund investors and others using ads with false historical performance information about exchange-traded fund portfolio strategy AlphaSector. According to the regulator, the firm publicized a performance track record that it got from F-Squared that was substantially overstated. Virtus had hired F-Squared as a mutual fund subadvisor as well as a subadvisor for those that followed AlphaSector.

The SEC, following its probe, said that Virtus falsely stated in SEC filings, client presentations, marketing collateral, and other communications that the AlphaSector’s strategy had a performance history going as far back as 2001 and had for a number years outperformed the S & P 500 Index. The investment management firm is accused of accepting F-Squared’s misrepresentations as fact while disregarding the red flags that raised doubts about these statements.

Six years ago Virtus recommended that shareholders of specific mutual funds and the boards of trustees approve a modification in strategy and management to AlphaSector and F-Squared. This recommendation was made because of the false historical data on AlphaSector.

SEC Enforcement Division Director Andrew J. Ceresney said that when an investment adviser makes the decision to advertise, it is its job to make sure that the information in its ads are accurate. Instead, claims the Commission, Virtus soliciting investors using performance data that was misleading and materially false.

It was just last year, in another enforcement action, that F-Squared acknowledged that it misrepresented a performance track record as real when that information was actually backtested and hypothetical with calculations that were inflated. It admitted to not having tracked one particular strategy from April 2001 to September 2008. F-Squared filed for bankruptcy in July. In December, it consented to a $35M settlement with the regulator to resolve charges accusing it of bilking investors via false performance advertising.

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Read the SEC Order Regarding Settled Administrative Proceedings (PDF)

Ex-F-Squared CEO Still Battling SEC, Firm Dealing With Fallout from Securities Fraud Charges, Stockbroker Fraud Blog, March 27, 2015

Exchange-Traded Fund Strategist F-Squared to Pay $35M to Settle Charges that It Misled Investors, Stockbroker Fraud Blog, December 24, 2014