The Department of Justice (DOJ) on Thursday announced criminal charges against the former chief investment officer and founder of New York-based investment adviser Infinity Q Capital Management for his role in a scheme to defraud investors by overvaluing derivative swap positions.
James Velissaris was also cited for lying to auditors and obstructing an investigation by the Securities and Exchange Commission (SEC) with the help of Infinity Q’s chief compliance and risk officer, according to the DOJ’s indictment. The chief compliance and risk officer was not identified.
Velissaris was charged in the Southern District of New York with securities fraud, wire fraud, lying to auditors, obstruction of justice, investment adviser fraud, and conspiracy to obstruct justice. Each of the first four charges carry a maximum sentence of 20 years in prison, while the latter two each carry a maximum sentence of five years in prison. Velissaris surrendered to agents from the Federal Bureau of Investigation in Atlanta on Thursday morning.
Velissaris also had civil charges against him announced Thursday by the SEC and the Commodity Futures Trading Commission (CFTC).
The details: Infinity Q started as a mutual fund in 2014 and began running a hedge fund in 2017. Velissaris exercised control over the firm until he was removed in February 2021 after the SEC shared with Infinity Q it believed Velissaris had been incorrectly valuing derivatives. At that time, the SEC issued an order to suspend redemptions of the firm’s mutual fund.
From at least 2017 through 2021, Velissaris executed an overvaluation scheme “by altering inputs and manipulating the code of a third-party pricing service used to value the funds’ assets,” according to the SEC. Infinity Q represented to investors and other stakeholders it used Bloomberg Valuations Service (BVAL) to independently calculate the fair value of these positions, but Velissaris made false entries in the system by secretly changing code that caused BVAL to alter and disregard certain critical terms, according to the DOJ.
“Altering and disregarding terms in this fashion caused BVAL to report values that were artificially inflated and, often, much higher than fair value,” the DOJ stated. Through his alleged actions, Velissaris collected more than $26 million in profit, according to the SEC.
“As alleged, James Velissaris violated his obligation to put the interests of his investors before his own profits,” said U.S. Attorney Damian Williams in a press release. “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.”
Upon discovery of Velissaris’s alleged activities in February 2021, Infinity Q liquidated the investment funds and sold derivative positions at a value that represented substantial losses to the investors in the investment funds, the DOJ stated.
The cover-up: “Velissaris tried to conceal his mismarking scheme, including from the Infinity Q funds’ independent auditor,” the SEC stated. “For example, in connection with the Infinity Q funds’ audits, Velissaris forged transaction confirmation documents by changing the actual transaction terms in order to deceive the auditor into thinking that the funds’ valuations were reasonable.”
Beginning in May 2020, the SEC opened an inquiry into Infinity Q’s valuation practices, prompting Velissaris to enlist the help of the firm’s chief compliance and risk officer to conceal his misdeeds, according to the DOJ. The two altered documents, in particular materials addressing Infinity Q’s valuation practices and policies, and misrepresented valuation committee meeting minutes, the DOJ’s indictment stated. Alleged alterations included removing language that stated “valuations are compared to the values provided by counterparties for reasonableness,” as such a comparison would have made the alleged misconduct obvious given the effect of the Covid-19 pandemic on the market.
SEC charges: The SEC alleged Velissaris overvalued assets by more than $1 billion while pocketing tens of millions of dollars in fees. The agency’s complaint charged Velissaris with violating antifraud and other provisions of the federal securities laws and seeks permanent injunctive relief, return of allegedly ill-gotten gains, civil penalties, and a public company officer-and-director bar.
“This case affirms our commitment to using all our tools to root out misconduct in the $18 trillion private fund arena, a growing market attracting more and more institutional investors, including public pension funds, university endowments, and charitable foundations,” said Gurbir Grewal, director of the agency’s Enforcement Division, in a press release.
CFTC charges: The CFTC’s complaint further emphasized how the scope and scale of Velissaris’s alleged misconduct increased amid the pandemic. The agency charged Velissaris with fraud and seeks restitution to defrauded pool participants, disgorgement of ill-gotten gains, civil monetary penalties, permanent registration and trading bans, and permanent injunctions.
“This action demonstrates that the Commission will continue to focus on customer protection across the multifarious markets and products under its jurisdiction,” said Acting Director of Enforcement Vincent McGonagle in a press release. “Misvaluing financial instruments such as the swaps in this matter violates core provisions of the Commodity Exchange Act’s anti-fraud prohibitions, and the Commission will vigorously seek to prosecute such violations.”