The US has criminally charged investment adviser James Velissaris with securities fraud and obstruction of justice over inflating the values of a mutual fund and a hedge fund he ran and devising a scheme to lie to investors and falsify documents.
The Infinity Q funds purportedly had US$3 billion in assets under management.
But the Department of Justice said in a press release that Velissaris misled investors over Infinity Q’s valuation process for over-the-counter derivatives that made up a substantial portion of the mutual and hedge funds.
The indictment alleges that the Infinity Q founder mismarked the securities and inflated the value of the investment funds by more than $1 billion to attract and retain more capital, and to increase his own compensation.
To avoid detection of the scheme, Velissaris allegedly provided both Infinity Q’s auditor and the US Securities and Exchange Commission with falsified or altered documents that supported the inflated values.
Civil suits filed by regulators, investors
The SEC and the US Commodity Futures Trading Commission have filed a civil suit against Velissaris.
And Cayman Islands-domiciled Dominus Multi-Manager Fund Ltd and Delaware’s investment advisory firm Schiavi + Dattani have brought a class-action suit against Velissaris, and 17 other defendants, including a Cayman Islands-based feeder fund, Infinity Q Volatility Alpha.
According to a General Registry search by Offshore Alert, Infinity Q had at least one other Cayman-domiciled entity, Infinity Q Commodity Fund Ltd.
“As alleged, James Velissaris violated his obligation to put the interests of his investors before his own profits. In order to attract and retain investments in the funds that he operated, Velissaris lied about the independence of the process that he used to value fund assets, and he manipulated that process to convince investors that the funds were performing much better than they were,” said US Attorney Damian Williams.
“He then tried to cover his tracks by submitting fabricated or altered documents to the funds’ auditor and the SEC. This case further demonstrates the Office’s continued commitment to stamping out financial fraud, whether it be in private funds or the public markets,” Williams added.
Mismarking positions
According to the indictment, Velissaris represented that Infinity Q used Bloomberg Valuations Service (BVAL) to independently calculate the fair value of its derivative positions.
It is alleged that the investment advisor modelled the positions in such a way that they were not based on the actual terms of the underlying contracts and inconsistent with fair value. In addition, he mismarked positions in the BVAL system by making false entries and “by secretly altering the computer code employed by BVAL that caused BVAL to alter and disregard certain critical terms”.
In some cases, as a result, identical positions held by both the mutual and the hedge fund had different values, while other positions had valuations that were mathematically impossible, the Department of Justice said.
After the mismarking scheme was uncovered in February 2021, Infinity Q liquidated the investment funds and sold its derivative positions at a loss of several hundred million dollars to the investors in the funds.
To prevent Infinity Q’s outside auditor from discovering the fraud, Velissaris allegedly provided falsified term sheets from counterparties to alter the true terms of certain over-the-counter derivative positions.
The indictment claims the investment manager also lied to the SEC, after it opened an inquiry in June 2020, by altering documents provided to investors about the valuation process and fabricating minutes of valuation committee meetings.
Velissaris, 37, who is from Atlanta, Georgia, is charged with securities fraud, wire fraud, lying to auditors, and obstruction of justice, each of which carries a maximum sentence of 20 years in prison. He is also charged with investment adviser fraud and conspiracy to obstruct justice, which carry a maximum sentence of five years in prison.
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