Securities Arbitration Lawyers Blog

A customer of Wells Fargo Advisors filed a FINRA complaint against Wells Fargo to seek the money he lost when his adviser invested his monies in “F-Squared Investments.”  The customer’s claim is that Wells Fargo failed to supervise his adviser properly, and also did not do the required due diligence in the investment that he recommended (F-Squared).  The customer is also seeking lost opportunity damages, which is the money he could have made if his money were invested in an S&P 500 Fund.

The SEC launched an investigation into F-Squared Investments and its co-founder and CEO Howard Present, in 2013.   According to the SEC’s Order of December 2014, F-Squared Investments agreed to pay $35 million and admit wrongdoing to settle charges that it defrauded investors through false advertising about its flagship product (AlphaSector).  The SEC alleged that while marketing AlphaSector into the largest active ETF (“exchange-traded funds”) strategy in the market, F-Squared falsely advertised a successful seven-year track record for the investment strategy based on the actual performance of real investments for real clients.  In reality, the algorithm was not even in existence during the seven years of purported performance success.  The data used in F-Squared’s advertising was actually derived through backtesting, although F-Squared and Howard Present specifically advertised the investment strategy as “not backtested.” Further, the hypothetical data contained a substantial performance calculation error that inflated the results by approximately 350 percent.

According to news reports, the customer in this case is an elderly person who claims that Wells Fargo did not perform due diligence on investments prior to selling them to the public.  Additionally, the customer claims that Wells Fargo failed to properly supervise one of its advisers and recommendations the advisor made to the client, who described himself as a “moderately conservative investor seeking moderately conservative growth”, concerning his investment risk.  The client claims that had Wells Fargo conducted full due diligence on the F-Squared product, it would have discovered red flags, additionally seeing that the ETF-based F-Squared product was not appropriate for a moderately conservative investor.