James Velissaris, who founded and managed the $1.7 billion mutual fund that collapsed last year, The Infinity Q Diversified Alpha Fund, was recently charged with securities fraud and obstruction of justice. The charges stem from Velissaris’ alleged inflation of fund asset values in order to keep investor money flowing. Then, prosecutors said Velissaris falsified records to conceal the corruption.
In February 2022, the fund halted investor redemptions after seven years of operation with Velissaris at the helm as chief investment officer. When a government investigation started, the 37-year-old stepped down and started liquidating the mutual fund and a parallel hedge fund he oversaw.
A Billion Dollar Over-Valuation
According to prosecutors, Velissaris inflated the fund’s holding values by $1 billion while he pocketed millions of dollars in fees. Then, he manipulated the results for at least four years to hide the fund’s poor performance.
According to the SEC, Velissaris executed the overvaluation through the alteration of inputs and manipulating the code of a third-party pricing service that he used to value the fund’s assets. They allege he pocketed more than $26 million in profit distributions and did not disclose any of these activities to investors.
“We allege that, while Velissaris marketed the mutual fund as a way for retail investors to access investment strategies typically reserved for high net worth clients, what he actually offered them were fraudulent documents, altered performance results, and manipulated valuations,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement.
In an attempt to cover up his scheme, the SEC alleges that Velissaris created backdated minutes of valuation meetings that never happened and altered documents describing Infinity Q’s valuation policies.
“We also allege that Velissaris sent forged term sheets to the auditor of the mutual fund and the private fund,” said Adam S. Aderton, Co-Chief of the SEC’s Asset Management Unit.
The SEC also alleges that the masking of the fund’s actual performance was Velissaris’ attempt to thwart investor redemptions who probably would have requested their money back once they found out about the fund’s failing performance.
The funds that Velissaris oversaw in the Infinity Q fund were supposed to generate returns that didn’t move in sync with the overall stock and bond markets. A lot of the fund’s holdings involved derivatives or bets on exotic investments as these are derived from other securities. Velissaris claimed the fund’s annual returns were around 9.5%.
Investigators found that at certain points in 2020, as the pandemic raged and wreaked havoc on financial markets, Infinity Q’s real values were half of what Velissaris told investors they were. What’s more, some positions were reported at valuations that were later deemed mathematically impossible, according to the SEC.
Around the same time, as the funds started to tailspin, prosecutors say Velissaris asked the owners of Infinity Q Capital Management for a $100 million loan — that was never made.
The SEC’s complaint charges Velissaris with violating antifraud and other provisions of the federal securities laws. It seeks permanent injunctive relief, return of the alleged ill-gotten gains, and civil penalties. The SEC also wants to ban Velissaris from serving as a public company officer and director.
The U.S. Attorney’s Office for the Southern District of New York also announced criminal charges against Velissaris. The Commodity Futures Trading Commission (CFTC) announced civil charges against him.
Velissaris was also charged with wire fraud and lying to auditors —the maximum prison sentence for each charge is 20 years.
The Bonderman Ties
Billionaire businessman and founder of private equity firm TPG, David Bonderman, was a major investor in the Infinity Q fund.
On the fund’s website, Velissaris claimed that the “investment team and control functions are largely the same for Wildcat and Infinity Q.” Wildcat is Bonderman’s hedgefund and reportedly had $100 million invested in The Infinity Q Diversified Alpha Fund.
Velissaris also claimed investors would have access to the “same alternative investment strategies that were originally created for the prosperous Bonderman family.”
When the SEC started investigating, Velissaris was placed on leave, and the owner of Wildcat and Infinity Q’s non-executive chairman took over managing Infinity Q.
In 2020, a spokesperson for Infinity Q Capital Management said the Bonderman was merely a passive investor and had no control over the fund’s investments. They also attested to losing a significant amount of money when the fund collapsed.
History Repeats Itself
Prosecutors alleged Velissaris’s asset mispricing of Infinity Q portfolios echoed prior issues at the mutual fund. For example, they say in 2016, the fund was late to file a regulatory report, claiming that an independent pricing service was unable to “support some of its valuations.”
After that, the fund’s trustees said they were working closely with Infinity Q Capital Management to “Make sure they maintain the appropriate source documentation for the fund’s valuation determinations. They also claim they enhanced the adviser’s trade allocation oversight to better identify errors and misallocations.
The allegations that Velissaris continued to manipulate returns and asset values for four more years after the incident solidifies the theory that Infinity Q’s trustees were not providing adequate oversight.
“Why was Velissaris in a position to misprice the assets for four years?” asked Marshall Glickman, an aggrieved Infinity Q fund investor.
To this day, the fund is still holding back investor money to cover litigation and other fund expenses. In 2021, trustees set aside $750 million for litigation against the fund. They said setting aside the funds was necessary because insurance does not cover expenses related to liquidation and government investigation. Because of this, Glickman reported only receiving 30% of his investment back.
What’s more, records show that investors who have already been hammered in the fraud are paying out about $900K per month in expenses. Between June of last year and February 2022, the expenses have totaled $7.24 million.
“If this case takes three years, that’s $36 million gone right there,” Glickman said.
The SEC continues to investigate the debacle, as Velissaris maintains his innocence. His attorney recently released a statement that said Velissaris managed investments with the “highest integrity in accordance with all applicable principles.” The statement went on to say that Velissaris is looking forward to vindication and that’s he’s the scapegoat for others who will “have to answer in court for their own compliance failures and the losses incurred by their irresponsible liquidation of the portfolio.”
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