F-Squared Filing for Bankruptcy

Last week, F-Squared, one of the fastest growing investment firms in the U.S.

Last week, F-Squared, one of the fastest growing investment firms in the U.S., announced plans to file for Chapter 11 bankruptcy protection. The announcement of F-Squared filing for bankruptcy came several months after settling a $35 million fraud charge for reporting false performance figures of its AlphaSector index.

F-Squared plummets into insolvency

F-Squared became popular with financial advisors as an exchange-traded fund manager for its AlphaSector Premium Index, which enabled it to attract $28 billion in assets in 2014. Rising from a non-entity in 2008 to become the No. 2 ETF strategist in the U.S. in 2015, the firm became the face of the ETF sector with claims that its proprietary rules-based strategy could circumvent market volatility, according to Morningstar. This strategy became particularly appealing following the financial crisis, which led to the firm’s rapid growth. F-Squared claimed that its AlphaSector strategy had seven years of success from 2001 to 2008, but these claims were later discovered to be fraudulent miscalculations to inflate their metrics.

As a result, the firm was charged in November with falsifying reports of its AlphaSector Index performance in its marketing materials, resulting in a $5 million fine to the SEC and $30 million reimbursement to clients. The SEC also charged co-founder and former CEO Howard Present for making false claims and misleading statements to investors. These events triggered a series of major setbacks for the firm, including contract terminations from their most aggressive promoters, including Virtus Investment Partners.

Virtus decided to drop F-Squared as a manager of five of its products, resulting in $5.7 billion in assets lost. The firm then saw an additional $8 billion in asset declines for its ETF strategies as mutual-fund distribution partners and financial advisors began to cut the firm’s AlphaSector products.

Following the series of setbacks, F-Squared was forced to reduce its workforce by 25 percent, including cuts in its executive ranks. Currently, F-Squared still owes Present $2 million as the firm’s largest creditor, with an additional $827,328 in legal fees and $115,537 in employee backpayments.

F-Squared sale

After filing for Chapter 11 bankruptcy protection, F-Squared announced its asset sale to Good Harbor Financial. In accordance with the terms, Good Harbor will acquire F-Squared’s intellectual property, investment strategies, and investment management contracts. Although the terms of the agreement were not publicly disclosed, Good Harbor did confirm that F-Squared CEO Laura Dagan will be replaced, with further downsizing expected for several of the remaining 121 F-Squared personnel. The deal is expected to be completed within 45 days.