Saturday, November 11, 2017

CEO of F-Squared Investments Steps Down After Defrauding Investors (2017)

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     F-Squared Investments, once one of the largest money managing firms in the United States, is now a corporation under serious scrutiny and the ever-watchful eye of U.S. financial regulators. After allegations of fraud and corruption for many years, Howard Present the former CEO of F-Squared investments, was left with no choice but to step down on October 6th, 2017. A federal jury sided with the U.S. Securities and Exchange commission in a Boston Courtroom and came to the verdict that Present was guilty and well aware of the fraudulent behavior he and his corporation were carrying out. The four week long trial concluded and Stephanie Avakian, the co-director of SEC's enforcement division, claimed to be very pleased with the jury's decision in finding Present guilty. 
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Howard Present arriving at a federal court in Boston.  (September 7th, 2017)
     Though they were once a very respected money manager, F-Squared had been battling allegations of fraud and corruption for years. It started back in 2008 when Present and F-Squared seriously marketed an investment product called AlphaSector. Present claimed the product had a successful record dating all the way back to 2001, but the successful record he was boasting was based almost entirely on a hypothetical algorithm/formula. Present used the formula and the record it created to alter historical market data and then he presented the successful record as though it was fact. To make matters worse, the illegitimate hypothetical algorithm F-Squared used to create AlphaSector's record was an exaggerated extremely optimistic formula to begin with. As it turned out, the formula had a mistake in it that resulted in a very inflated potential market performance for the investment product. It was later found that Howard Present was aware of the mistake his financial analyst made, but continued to use the formula to advertise AlphaSector's investment potential.
     Even though Present was aware of the mistake and therefore aware of the exaggerated market potential of the investment product, he continued to allow F-Squared Investments to sell AlphaSector to interested investors. Investors were interested in the investment product because the AphaSector strategy for investing in exchange-traded funds was outperforming the S&P index, a popular benchmark for U.S. stock market performance. On top of this, Present even managed to convince other firms to encourage their investors to buy into AlphaSector. These firms were unaware that AlphaSectors potential was calculated with a faulty algorithm and inaccurate historical market data however, so they went right ahead and encouraged investors to invest in AlphaSector as well. This resulted in many investors buying from F-Squared, as well other firms, investing in AlphaSector without any insight as to what the real value of the investment product was. 
     Present claimed to not have any knowledge of the mistake in the algorithm and denied all wrongdoing. His attorney also publicly stated that what Present was claiming was what he believed to be the truth. In 2014 the SEC sued Present and F-Squared Investments ended up agreeing to pay 35 million dollars to settle the charges and accusations that they had been defrauding investors. It came just this past October, three whole years later in 2017, that a verdict finding Present guilty was made and he was forced to step down from his position as CEO. Justice seems to have been served, but there is no clear resolution in sight for Howard Present as the SEC still wants Present to forfeit earnings and pay further penalties. 
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Former CEO of F-Squared Howard Present (March, 2015)


     The stakeholders in this case, or in any case are the individuals who are directly impacted by the scandal and the decisions made in said scandal. The major stakeholders in this case would be former CEO Howard Present, other high up executives at F-Squared who were aware of the flaw in the formula used to calculate AlphaSector's market potential, the financial analyst who made the mistake, and all of the investors were defrauded and provided with the false information that lead to them buying into the investment product. The federal jury that found Present guilty and Stephanie Avakian, the co-director of the SEC's Enforcement division, would also be considered minor stakeholders in this case, because though they were not directly impacted by F-Squared's decision to present investors with false information, both the jury and Avakian played key roles in finding Present guilty and getting justice for all those who invested in AlphaSector. Present and the other top executives at F-Squared are the stakeholders who were held most accountable for the scandal. They are the ones who were aware of the false information their company was presenting and chose not to do anything about it. Now, they are the stakeholders who will suffer the most because Present was forced to step down from his position, and the other executives will either share the same fate, or be tasked with refunding all the investors who were lied to through penalty fees that the SEC will be charging F-Squared with.


Individualism is an ethical theory that encourages individuals to do whatever they can to be successful so long as they do not break any laws. The theory pushes entrepreneurs of all kinds to allocate their resources as efficiently as possible and make their companies as successful as they can be without taking part in any illegal behavior. Under the theory of Individualism, "Business actions should maximize profits for the owners of a business, but do so within the law" (Salazar 17). In terms of this case, an individualist would be very disappointed in the way F-Squared Investments behaved as a company. The individualist would be most angry with the actions of the company's former CEO Howard Present. The thinker would not like the fact that Present was well aware that his corporation was defrauding his investors with false information in order to make a profit. The individualist would perhaps find it quite just that Present was forced to step down from his position and is currently expected to pay large sums in fines and penalties. As far as moving forward goes for F-Squared, the Individualist would most likely instruct the company executives to refund all of the investors who bought into AlphaSector. He would then instruct the decision makers within the corporation to stop offering investment products that currently use, or have ever used any false information in their advertisements. If Present wanted to abide by the laws of individualism he would have needed to avoid breaking the law at all costs. F-Squared had been accused of unethical business dealings and fraudulent behavior for many years, so it is tough to estimate how far back Present would need to go in order to start abiding by the laws of individualism. For this particular case however, Present would have needed to go back to the day his financial analyst provided him with a faulty algorithm to calculate AlphaSector's investment potential, and simply not use that formula. It also would have been much more beneficial in terms of long run profitability for the company had they stayed within the law because now, as a result of their actions, F-Squared Investments is being forced to pay millions of dollars in fines and penalties.


Utilitarianism is a moral theory that believes the end result of a decision is what is most important. It is a theory that does not put too much focus on the reasoning for a decision, so long as the end result is favorable for the majority of the people impacted. The theory also states that "Business Actions should aim to maximize the happiness in the long run for all conscious beings that are affected by the business action" (Salazar 17). The theory wants what is best for the majority of those who it affects, meaning that in a one hundred person room, if fifty one people are happy with a decision and forty nine people are left displeased with a decision, according to Utilitarian Theory, the decision was a good one.  In this case, a Utilitarian thinker would not be pleased with decisions made by Howard Present and the other top level company executives. The Utilitarian would not like F-Squared's decision to market a product with false information and defraud investors, because in the end the vast majority of people who were affected by this were left unhappy with what resulted. Investors did not get their money's worth when they purchased an investment product that boasted successful returns, but was actually just very exaggerated. The decision makers within the company are also left with negative consequences as they are now facing pressure to step down from their positions. The decisions made in this scandal had negative consequences for all. If a utilitarian were presented the opportunity of making decisions for F-Squared Investments, he or she certainly would not defraud investors in a scandal like the one that transpired. Instead the Utilitarian would only take part in legitimate business dealings with the goal of "maximizing the overall good," exactly what the theory wants. If Present and the other decision makers within the company wanted to act in a Utilitarian manner, all they would've needed to have done was stop for a moment and consider whether or not their decisions were going to leave the majority of those involved satisfied. If Present had actually stopped for a moment and thought about the outcome for his investors, I think the the end result would've been more favorable for everyone that was involved.


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Howard Present discussing stocks on CNBC. (January, 2011)
Kantianism is an ethical philosophy that encourages honest, rational decision making. Under Kantian Philosophy, a decision is only as good as the rationale and reasoning behind the decision. If the decision was made with good will and honest intentions, a Kantian thinker would approve of the decision regardless of the outcome. Under the philosophy of Kantianism, Kant himself believes that the motivation to be honest and rational comes from good will and because it is ones duty to do so. "Respect for people's freedom and rationality helps people to make good decisions" (Salazar 21). It is quite clear that Present did not respect his investors, because if he had, he would have come out sooner and let investors know that AlphaSector's potential was extremely exaggerated and calculated with a faulty algorithm, rather than just continue to let investors pour their money into AlphaSector. In this case a Kantian thinker would disapprove of the decisions made by Howard Present and F-Squared. The decisions they made had intentions of getting investors to purchase a product for much more than it was worth in an attempt to maximize profit and skimp on quality. These decisions were clearly not truthful or honest in anyway. Presenting false information to investors is about as dishonest as one can get in the world of finance. Present also failed to abide by the Formula of Humanity, one of the key principles of Kantianism. The Formula of Humanity stresses that we treat our fellow members of humanity with honesty and respect. A Kantian philosopher would argue that all those who were aware of the false information that was being used in marketing the product, but chose to do nothing about it acted immorally. What Present and other executives at F-Squared should've have done is follow Kantianism and use honest rationale in their decision making. Present's decision to continue selling AlphaSector was driven by self interest rather than good will. In order to follow Kantian philosophy, Present and the other executives making decisions should've been more honest, and used good will to make decisions that were more beneficial to investors, and society as a whole when it came to AlphaSector. 

Virtue Theory

Virtue Theory is a theory that tries to enforce honesty, courage, temperance, and Justice in all decision making. The theory assesses whether or not a person, or a company, acted with proper virtue and morality. Proper Virtues consist of "Any character trait that aids flourishing" (Salazar 23). The theory also believes the decisions one makes are a direct reflection of their character. Similar to Kantianism, Virtue Theory places more value upon the honesty, virtue, and morality of a decision rather than on the outcome of the decision. In this case, Howard Present did not follow Virtue Theory. As previously stated, his decisions were dishonest and the information he gave investors was not truthful information. Howard Present may have believed what he was doing was courageous for himself and other potential beneficiaries within the company, but in the end, he showed lack of courage as it took many years and a lot of pressure for him to finally step down from his position as CEO.  Present's decisions also lacked justice and temperance as they did not result in positive, fair outcomes for investors, or anyone involved for that matter. In order to follow Virtue Theory, Present and other executives should have placed more focus on providing investors with honest information, but unfortunately Present and F-Squared Investments as a whole, did not abide by the laws of Virtue Theory when they decided to market AlphaSector without honesty, or justice, and now it clearly shows. The decisions made lead to an army of angry investors, a 35 million dollar forfeiture on F-Squared Investment's behalf, and Howard Present having to step down from his position as CEO of the company he co-found. I think it is clear that Present's character and virtue were represented in the decisions and lack of decisions he chose to make. It is simply a shame for the investors involved and the future of F-Squared, that he lacked proper virtue and ethical character.


1 comment:

  1. Dave-
    This is my first time hearing about this case but it seems very interesting and you did a good job of presenting it to the reader in a clear and concise way. It seems like this type of fraud is always happening in the world of business and it's scary to think about.