Home Substantial portion founder and former chief investment officer of a New York-based investment adviser charged with securities fraud and obstruction of justice | USAO-SDNY

founder and former chief investment officer of a New York-based investment adviser charged with securities fraud and obstruction of justice | USAO-SDNY

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Damian Williams, United States Attorney for the Southern District of New York, and Michael J. Driscoll, Deputy Director in Charge of the New York Bureau of the Federal Bureau of Investigation (“FBI”), announced that JAMES VELISSARIS, the founder and former chief investment officer of Infinity Q Capital Management (“Infinity Q”), a New York-based investment adviser that managed a mutual fund and a hedge fund believed to have approximately $3 billion in assets under management, was charged with securities fraud and obstruction of justice for orchestrating a scheme to lie to investors and falsify documents. VELISSARIS made false and misleading statements to investors and others regarding Infinity Q’s process for valuing certain over-the-counter (“OTC”) derivative positions that constituted a substantial portion of mutual fund holdings and hedge funds, and also fraudulently mismarked those securities in a way that did not reflect their fair value. VELISSARIS committed the rating error scheme in order to inflate the value of investment funds as reported to investors, to attract and retain capital and to increase its own compensation. In order to avoid detection of the scheme, VELISSARIS provided both Infinity Q’s auditor and the Securities and Exchange Commission (“SEC”) with falsified or altered documents, including providing the auditor with of modified conditions which served to provide fabricated support for the fraudulently inflated values. VELISSARIS turned himself in to FBI agents in Atlanta, Georgia this morning and is expected to be presented later today.

US attorney Damian Williams said: ‘As alleged, James Velissaris breached his duty to put the interests of his investors before his own profits. In order to attract and retain investment in the funds it operated, Velissaris lied about the independence of the process it used to assess fund assets, and it manipulated that process to convince investors that the funds worked much better than they were. He then tried to cover his tracks by submitting fabricated or altered documents to the fund’s auditor and the SEC. This case demonstrates once again the Bureau’s ongoing commitment to eradicating financial fraud, whether in private funds or public markets.

FBI Deputy Director Michael J. Driscoll said, “Investment fraud schemes may seem like a tried-and-true get-rich-quick scheme, but perpetrators are often overconfident in their ability to conceal their illegal activity. to investigators. As was the case with Velissaris, the truth caught up with him and his alleged lies were exposed. Today, he faces the consequences of his actions.

According to the allegations contained in a six-count indictment released today in Federal Court and other publicly available information:[1]

Fund

VELISSARIS was the founder and Chief Investment Officer of Infinity Q, an investment advisor that managed both a mutual fund (the “Mutual Fund”), established circa 2014, and a hedge fund (the “Fund Hedging Funds” and collectively the “Investment Funds”), began circa 2017. By 2021, the two funds were expected to have approximately $3 billion in assets under management. Infinity Q was headquartered in New York, New York, and employed a small team that included a Compliance Officer and a Risk Officer (“Employee-1”).

A major component of mutual fund and hedge fund holdings consisted of over-the-counter (“OTC”) derivative positions that involved tailored contracts that allowed counterparties to take positions on volatility or price movements. underlying assets or indices. . VELISSARIS, through Infinity Q, has disclosed to its investors that it is valuing these OTC derivative positions on a fair value basis and has used the services of a independent third-party provider. In particular, Infinity Q has disclosed to investors and other stakeholders that it uses Bloomberg Valuations Service (“BVAL”) to independently calculate the fair value of these positions, in accordance with the terms of the underlying derivative contracts. These OTC derivative positions represented hundreds of millions of dollars of investment fund portfolios.

Velissaris’ scheme to lie to investors and inflate derivative swap positions

In fact, however, VELISSARIS defrauded Infinity Q investors by taking an active role in valuing Infinity Q positions and modeling positions in a way that was not based on actual contract terms. underlyings and which was inconsistent with the fair value. VELISSARIS’ contribution to BVAL’s valuation process was inconsistent with Infinity Q’s statements regarding the independence of the process and allowed VELISSARIS to fraudulently mismark positions in BVAL. VELISSARS engaged in an error in marking positions in BVAL by making false entries in BVAL’s system, including secretly modifying the computer code employed by BVAL which caused BVAL to modify and ignore certain critical terms. By modifying and ignoring the terms in this way, BVAL declared values ​​artificially inflated and, often, much higher than the fair value.

By manipulating positions on OTC derivatives in BVAL in this way, VELISSARIS has ensured that many positions in investment funds have abnormal and, sometimes, impossible valuations. For example, VELISSARIS has at times effected manipulations in the mutual fund and/or the hedge fund which have caused certain identical positions held by both the mutual fund and the hedge fund (i.e., a position where all material terms are the same) to have substantially divergent values. In other cases, some of the manipulations of VELISSARIS have caused certain positions held by the investment funds to have impossible values, for example when, according to the actual terms of the swap, the value adopted by VELISSARIS could only be true if the volatility was negative – a condition that is mathematically impossible.

Ultimately, after the discovery of the VELISSARIS tagging scheme in or around February 2021, Infinity Q liquidated the investment funds and sold its OTC derivative positions. These positions were sold for hundreds of millions of dollars less than their purported market values ​​in BVAL, resulting in substantial losses for investors in the investment funds.

Velissaris lies to auditors and obstructs SEC investigation

In order to conceal this scheme and prevent its detection, VELISSARIS lied to many outside actors and regulators. First, in order to prevent Infinity Q’s external auditor (the “Auditor”) from uncovering the fraud, VELISSARIS provided the Auditor with falsified counterparty term sheets which it had modified to modify the actual terms of certain OTC derivative positions. In particular, as part of a number of audits, the auditor selected certain OTC positions that he would independently assess in order to confirm the reasonableness of BVAL’s Infinity Q values. In order to ensure that the auditor would not arrive at materially different results when independently evaluating the positions that VELISSARIS had manipulated in BVAL, VELISSARIS modified the terms of certain transaction documents and provided them to the listener. After receiving these falsified documents and relying on them in his independent assessment, the Statutory Auditor confirmed the reasonable nature of the valuations of VELISSARIS at BVAL.

Additionally, beginning in May 2020, the SEC initiated an investigation and subsequent investigation into Infinity Q’s valuation practices. As part of this investigation, VELISSARIS provided false and misleading information to the SEC. For example, when the SEC requested original documents that had been provided to investors, VELISSARIS modified the documents before providing them to the SEC, including some changes that would help hide its mis-marking scheme. For example, the original Infinity Q investor documents stated that “[o]Once a price is established for a portfolio security, it must be used for all Funds that hold the security. As explained above, this was false and on numerous occasions, manipulations in BVAL carried out by VELISSARIS caused the same positions in the FCP and the Hedge Fund to have significantly different values. To cover up the falsity of Infinity Q’s disclosures, VELISSARIS and Employee-1 removed this line from investor materials that were provided to the SEC.

In June 2020, the SEC asked Infinity Q to provide additional documents, including documents regarding Infinity Q’s valuation committee and all of its meeting minutes. Infinity Q’s investor documents indicated that Infinity Q had a valuation committee, including VELISSARIS, that the committee would meet monthly or more often, and that VELISSARIS would be responsible for preparing the minutes of those meetings. In fact, however, VELISSARIS had kept no notes of these meetings. As a result, days before responding to the SEC, VELISSARIS drafted memos purporting to be from review committee meetings in 2019 and 2020 and submitted them to the SEC.

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VELISSARIS, 37, of 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 ; and investment adviser fraud and conspiracy to obstruct justice, each punishable by up to 5 years in prison. The maximum potential penalties in this case are prescribed by Congress and are provided here for informational purposes only, as any sentencing of the accused will be determined by a judge.

Mr. Williams praised the work of the Federal Bureau of Investigation. He also thanked the Securities and Exchange Commission and the Commodity Futures Trading Commission for their cooperation and assistance in this investigation.

This matter is being handled by the Bureau’s Securities and Commodities Fraud Task Force. Assistant U.S. Attorneys Daniel Loss and Daniel Tracer are charged with the prosecution.