(Adds details from trial, background on case)
BOSTON, Oct 6 (Reuters) - A U.S. jury on Friday found that the former chief executive of F-Squared Investments Inc, once the largest U.S. money manager creating portfolios out of exchange-traded funds, violated federal securities laws.
The federal jury in Boston sided with the U.S. Securities and Exchange Commission in finding that former F-Squared CEO Howard Present intended to defraud investors or was reckless in how he touted the history of his company's flagship investment product.
The verdict came after lawyers for both sides delivered closing arguments following a four-week trial. The verdict will allow the SEC to ask a federal judge to impose an injunction and order Present to forfeit earnings and pay penalties.
Present, the co-founder of Wellesley, Massachusetts-based F-Squared, denied wrongdoing. His lawyer declined to comment.
The SEC sued Present in 2014 on the same day it announced F-Squared had agreed to pay $35 million and admit wrongdoing to resolve claims it misled investors by falsely advertising the performance of an investment product called AlphaSector.
At its height, F-Squared was one of the largest U.S. firms of its kind, with more than $28 billion invested with it, the SEC said. It filed for bankruptcy in 2015.
According to the SEC, beginning in September 2008, Present began marketing AlphaSector as having a successful record dating back to 2001 that was based on a multibillion-dollar wealth manager's strategy.
"But really, it was all made up," SEC lawyer Rachel Hershfang told jurors on Friday.
In truth, the data F-Squared used to market AlphaSector was based on an algorithm developed by a college student at a nearby firm and was applied to historical market data, resulting in a hypothetical performance, the SEC said.
The SEC also said an F-Squared analyst who calculated the hypothetical numbers made a mistake in the process that substantially inflated the investment performance that appeared in marketing materials Present wrote.
Despite learning about the error, Present did not tell the analyst to correct it and continued using the inflated performance figures, the SEC said.
Present's lawyer, Anthony Fuller, told jurors in his closing argument that his client honestly believed that the strategy AlphaSector was based on had actually been used with real client funds when he licensed it from another firm.
"He reasonably believed in what he was saying," Fuller said.
The case is Securities and Exchange Commission v. Present, U.S. District Court, District of Massachusetts, No. 14-cv-14692. (Reporting by Nate Raymond in Boston; Editing by Andrew Hay and Jonathan Oatis)