Investors in Infinity Q Capital Management’s (Infinity Q) funds filed a proposed class action against the firm last week after the fund’s founder was charged with securities fraud and obstruction of justice for allegedly inflating assets by over $1 billion and falsifying records.
The complaint, which was filed last Thursday in the U.S. District Court for the Eastern District of New York, alleges that the hedge fund and mutual fund “lost over 40% of their respective values after a forced liquidation by the SEC” in “one of the most egregious investment fund collapses in history.”
The proposed class of investors accuses Infinity Q, the investment adviser that managed the funds, of manipulating the fund assets’ pricing methodology and overstating the funds’ net asset value (NAV) from 2017 to 2021. The investors allege that at the same time, Infinity Q intentionally misled investors by providing marketing materials that boasted of the funds’ robust valuation procedures, methodologies, oversight, and controls designed to ensure accurate NAV pricing.
The investors further allege that Infinity Q halted investor redemptions in February 2021, when at least two whistleblowers reported concerns to the SEC about the funds, prompting a formal, ongoing SEC investigation and Infinity Q’s liquidation of the funds’ assets. “As a result of these egregious acts, the funds’ investors have been unable to withdraw their money from the funds, and investors are still waiting and wondering what amount they will receive from the wreckage as defendants continue to deplete available assets on legal defense costs,” the investors allege.
The investors filed the complaint the day after James Velissaris, founder and former chief investment officer of Infinity Q, was criminally indicted for securities fraud and obstruction of justice. According to the indictment, Velissaris manipulated the valuations for at least four years, creating results that were not only false but “mathematically impossible.” The indictment also states that Velissaris endeavored to mask the scheme by lying to auditors and altering term sheets and other documents from counterparties for over-the-counter (OTC) derivative positions so that they would appear to support the inflated values.
On the same day as the indictment, both the SEC and the Commodity Futures Trading Commission (CFTC) charged Velissaris with fraud in parallel civil actions. The SEC asserts that Velissaris and Infinity Q inflated the funds’ stated valuations by, among other things, manipulating computer code in the valuation models and knowingly entering incorrect inputs in what Velissaris had told investors was an independent third-party pricing service. Through this conduct, Velissaris materially inflated the mutual fund’s NAVs and the private fund’s total assets while pocketing over $26 million in management fees, according to the SEC.
The SEC further alleges that in doing so, Velissaris deceived investors who likely would have requested redemptions had they known the funds’ actual performance, particularly given the volatility of the market during the COVID-19 pandemic. Echoing these claims, the CFTC additionally asserts that Velissaris’ “false record of success” allowed Infinity Q to charge inflated fees, induce existing pool participants to further invest, and lure in new investors.
The foregoing court filings collectively seem to suggest that Velissaris and Infinity Q were able to carry out this scheme undetected for years due to the complexity of the “alternative strategies” investments Infinity Q offered. For example, OTC derivatives, which made up a substantial portion of Infinity Q’s mutual and hedge funds, are contracts between private parties rather than trades effected on a public exchange. As a result, even when market conditions were stable, investors had scarce opportunity to perform their own valuations or risk analysis, and were thus highly dependent on Infinity Q’s purported expertise and methodologies. Undoubtedly, the market turmoil driven by the COVID-19 pandemic only increased the uncertainty surrounding these investments. It thus comes as little surprise that Velissaris may have exploited the “unprecedented market volatility” caused by the pandemic, during which time “the scope and scale of the fraud increased,” according to the CFTC.
The SEC and CFTC seek injunctions, civil monetary penalties, restitution, disgorgement, pre- and post-judgment interest, and bans on trading, registration, and service as an officer or director against Velissaris. In the proposed class action, the investors seek, among other relief, compensatory damages and rescission for all proposed class members who purchased securities issued by the funds from December 2018 to February 2021.
 Schiavi + Company LLC dba Schiavi + Dattani et al. v. Trust for Advised Portfolios et al., No. 1:22-cv-00896 at ¶ 2 (E.D.N.Y. filed February 17, 2022).
 Id. at ¶ 10.
 Id. at ¶ 12.
 Id. at ¶ 19.
 U.S. v. Velissaris, No. 1:22-cr-00105 at ¶ 3 (S.D.N.Y. February 17, 2022).
 Id. at ¶ 5.
 SEC v. Valissaris, No. 1:22-cv-01345 at ¶¶ 3, 85 (S.D.N.Y. filed February 17, 2022).
 Id. at ¶ 12.
 Id. at ¶ 6.
 CFTC v. Valissaris, No. 1:22-cv-01347 at ¶ 3 (S.D.N.Y. filed February 17, 2022).
 Id. at ¶ 1.