Investment Advisers Sanctioned for Lack of Due Diligence

The Securities and Exchange Commission (“SEC”) recently announced it had imposed monetary penalties on thirteen investment advisory firms.  The SEC concluded the thirteen firms failed to conduct due diligence to determine the veracity of false claims made by an investment management firm before the firms began recommending the investment to their own clients.


The enforcement action concerned claims made by F-Squared Investments (“F-Squared”).  F-Squared claimed its “AlphaSector” strategy for investing in exchange-traded funds (“ETF”) had outperformed the S&P Index for several years.  A subsequent SEC enforcement case, however, determined that F-Squared’s track record was substantially inflated and its strategy had not been nearly as successful as it had claimed.

SEC Concludes Investment Advisers Failed to Conduct Due Diligence

According to the SEC, the thirteen investment advisory firms had recommended the ETF investment strategy to their own clients — while repeating F-Squared’s false claims about its track record — without first obtaining sufficient documentation to substantiate F-Squared’s claims.   This constituted a violation of the firms’ duty to conduct its own due diligence before recommending an investment to its clients.  The SEC imposed monetary penalties on the firms ranging from $100,000.00 to $500,000.00, depending upon the fees each firm had earned in connection with the F-Squared investment.

In the SEC’s announcement, Director of the SEC Enforcement Division Andrew J. Ceresney made it clear that an investment adviser has an affirmative duty to conduct due diligence to verify performance claims touted by another firm.  “When an investment adviser echoes another firm’s performance claims in its own advertisements, it must verify the information first rather than merely accept it as fact,” said Mr. Ceresney.  “These advisers negligently passed many of F-Squared’s claims onto their own clients, who were consequently relying upon false and misleading information when making investment decisions.”  The SEC further stated it was continuing to investigate and pursue similar actions against other advisers who had likewise potentially misled investors concerning the F-Squared investment.

You may view the SEC’s full Press Release here.

Law Offices of Robert L. Hill, APC

The Law Offices of Robert L. Hill, APC, represents individuals who have lost money through investment fraud, negligence, breach of fiduciary duty, and (if the victim is over the age of 65) financial elder abuse.  The firm handles cases through the FINRA arbitration process, as well as California state and federal court.  The firm is located in Carlsbad, California, serving clients throughout the state.


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