FINRA claim filed against Wells Fargo to recover investment losses

GREENVILLE, S.C. - June 16, 2015 - PRLog -- The White Law Group announces that it has filed another Financial Industry Regulatory Authority (FINRA) arbitration statement of claim against Wells Fargo.  This claim seeks to recover losses of approximately $35,000 and lost opportunity damages of over $150,000.

The claim, filed by The White Law Group, was submitted to FINRA Dispute Resolution on behalf of a South Carolina investor alleging claims for violation of common law fraud, breach of fiduciary duty, negligence, and negligent supervision. The claim further alleges that Wells Fargo unsuitably invested the client in Good Harbor Financial US Tactical Core and F Squared Investments AlphaSector Allocator Select, two money managers that horribly underperformed the market over the relevant time period.

Additionally, on December 22, 2014, the SEC announced that it had settled charges with investment management firm F-Squared Investments that it defrauded investors through false performance advertising.  Under the settlement agreement, F-Squared agreed to pay $35 million and admit wrongdoing. The SEC separately charged the firm’s co-founder and former CEO Howard Present with making false and misleading statements to investors as the public face of F-Squared.

According to the SEC’s Order, the firm began receiving signals from a third-party data provider in September 2008 indicating when to buy or sell an investment.  The signals were based on an algorithm, and F-Squared and Present used the signals to create a model portfolio of sector ETFs that could be rebalanced periodically as the signals changed.  They named the new product “AlphaSector” and launched the first index a month later.  AlphaSector’s indexes quickly became the firm’s largest revenue source, and F-Squared went from losing money to becoming a highly profitable investment manager.

The SEC alleged that while marketing AlphaSector into the largest active ETF 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, which is the application of a quantitative model to historical market data to generate a hypothetical performance during a prior period.  F-Squared and Present specifically advertised the investment strategy as “not backtested.”  Furthermore, the hypothetical data contained a substantial performance calculation error that inflated the results by approximately 350 percent.

F-Squared and Present allegedly made the false and misleading statements about AlphaSector from September 2008 to September 2013.  The SEC alleged that they claimed AlphaSector was based on an investment strategy that had been used to invest client assets since April 2001.  Yet Present apparently knew that the algorithm was not finalized until late summer 2008 when he devised rules for turning the signals into a model ETF portfolio and directed an assistant to calculate hypothetical returns for the portfolio going back to April 2001.

The SEC further alleged that the F-Squared analyst who calculated the backtested AlphaSector performance inadvertently applied the buy/sell signals to the week preceding any ETF price change that the signals were based on.  The mistake carried the model portfolio’s backtested buy and sell decisions back in time one week, enabling the model to buy an ETF just before the price rose and sell an ETF just before the price fell.  The SEC alleged that the analyst tried to explain this possible calculation error to Present in late September 2008, yet F-Squared went on to advertise the inflated data for the next five years and overstated that AlphaSector significantly outperformed the S&P 500 from April 2001 to September 2008.

Finally, the SEC alleged that not only did F-Squared and Present attract clients to this investment strategy by touting a track record they presented as real when it was merely hypothetical, but the hypothetical calculations also were substantially inflated.

Before recommending an investment, a broker-dealer has a fiduciary duty to adequately disclose the risks involved in the investment and to perform the necessary due diligence to determine whether the investment is suitable for the investor.  It is alleged that Wells Fargo failed to perform the necessary due diligence on these investments prior to recommending them to this particular investor and that had they performed due diligence the investor would not have been placed in these particular money managers.

FINRA Dispute Resolution is an arbitration venue for investors with claims against their brokerage firm or financial professional.  It provides investors with an opportunity to attempt to recoup their investment losses and is an alternative to filing such claims in court.

For more information on the claim filed by The White Law Group, please contact the firm's Chicago office at 312-238-9650.

The White Law Group is a national securities fraud, securities arbitration, and investor protection law firm with offices in Chicago, Illinois and Vero Beach, Florida.  For more information on The White Law Group and its representation of investors in FINRA arbitration claims, visit http://www.whitesecuritieslaw.com.