(Bloomberg) -- F-Squared Investments agreed to pay $35 million over U.S. regulatory claims that it misled investors about the performance of a trading strategy used by exchange- traded funds.

The firm admitted to using hypothetical performance data for a seven-year period before the product existed, the Securities and Exchange Commission said in a statement today. Investors were told that the performance represented actual results, the SEC said.

Investigators also found that the hypothetical data contained an error that further inflated the performance results by about 350%, the SEC said.

“Investors must be able to trust that performance advertisements are accurate,” said Andrew Ceresney, director of the SEC’s enforcement division. “F-Squared has admitted that it misled its clients over a number of years about the existence and success of its core strategy.”

In a statement, F-Squared said the strategy, known as AlphaSector, has performed as expected since it was launched in 2008 and “clients have seen the results” in their returns.

“We greatly appreciate the continued support of our clients who have maintained confidence in F-Squared’s ability to deliver downside protection in down markets and upside participation in rising markets,” F-Squared Chief Executive Officer Laura Dagan said in the statement.

F-Squared explicitly advertised AlphaSector’s performance as “not back-tested,” the SEC said. An F-Squared analyst tried to inform former CEO Howard Present about a mistake in the performance model in 2008. The formula continued to be used for the next five years, according to the agency.

The SEC also sued Present, alleging that he made false statements to investors. Samuel Winer, an attorney for Present, didn’t immediately return a call seeking comment.

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