Founder and Manager a $1.7 billion mutual fund that collapsed last year was charged by federal prosecutors with securities fraud and obstruction of justice for allegedly inflating the value of fund assets to preserve investors’ cash flow, then falsifying records to conceal fraud. suitable.
The Infinity Q Diversified Alpha Fund halted investor acquisition in February 2021, about seven years after the fund was co-founded by 37-year-old James Velissaris, its chief investment officer. A government investigation began, Velissaris resigned, and the mutual fund and a parallel hedge fund he oversaw began to liquidate.
It’s a rare example of a major mutual fund failing amid an active bull market. And the collapse brought with it billionaire investor David Bonderman, the co-founder of TPG, a private equity The company went public this year. The Bonderman family are major investors in Infinity Q Capital Management, the investment firm overseen by Velissaris, regulatory documents show. Velissaris worked for the Bonderman family before co-founding Infinity Q Capital Management.
Prosecutors said Velissaris inflated the value of the fund’s holdings by $1 billion and manipulated the results for at least four years to conceal underperformance. Prosecutors said that at certain times in 2020 when the pandemic was raging in financial markets, the real value of the funds was about half of what investors were told. Some positions held by the mutual fund “have been reported at a valuation that is mathematically impossible,” according to a civil complaint filed against Velissaris Thursday by the Securities and Exchange Commission.
In addition to securities fraud and obstruction of justice, Velissaris is also charged with wire fraud and lying to auditors. Each charge carries a maximum sentence of 20 years in prison.
The SEC also alleges Velissaris pocketed $27 million in management fees because he improperly valued the fund’s holdings. The SEC said its investigation into the incident is continuing.
Mark Schonfeld, an attorney at Gibson Dunn who represents Velissaris, issued this statement: “James manages the investments at Infinity Q with the utmost integrity in accordance with all applicable guidelines. We wish to exonerate James, who has been made a scapegoat for others, to answer in court for their own compliance failures and losses resulting from the liquidation of their portfolio. irresponsible way.”
A spokesperson for Infinity Q Capital Management declined to comment.
Funds overseen by Velissaris aim to generate returns that do not move in tandem with the overall stock and bond markets. Many of their holdings involve bets on exotic investments known as derivatives, because they are derived from other securities. The funds were claiming annual returns of about 9.5 percent before they folded.
Bonderman’s relationship is a selling point for Infinity Q; a presentation from the fund boasted that its investors would have access to the same “originally created alternative investment strategy” for prosperous families. Last year, a spokesperson for Infinity Q Capital Management said the Bonderman family is a passive investor in the company and has no control over its investments. A spokesman said the family had lost “a substantial amount of money” in the collapse. TPG, the private equity firm co-founded by David Bonderman, did not respond to Bonderman’s request for comment on prosecutors’ allegations.
Prosecutors said the property mispricing took place from at least 2017 to 2021. Around March 2020, when funds were struggling, Velissaris sought a $100 million loan la from the owners of Infinity Q Capital Management, the SEC said. The loan was not made.
Prosecutors’ allegations of mispriced assets in the Infinity Q portfolio echo previous problems at the mutual fund. In 2016, the fund was slow to file regulatory reports because an independent valuation service was unable to “support” some of the fund’s valuations. Following that incident, the fund’s trustees, responsible for overseeing it for investors, noted that they were “working closely” with Infinity Q Capital Management.”to ensure that source material appropriate for its validity is maintainedand the advisor’s trade allocation monitoring has been enhanced to better identify any errors or misallocations. “
Allegs that Velissaris manipulated returns and asset values in the four years following that incident showed inadequate oversight by the fund’s trustees, said Marshall Glickman, a nasty investor in the Infinity fund. Q, said. “How can Velissaris misrepresent her assets for four years?” he asks.
Also worrisome, Glickman said, is the amount of investor money currently being withheld by fund managers to cover lawsuits and other costs incurred by the fund. Last year, the trusts set aside $750 million, saying the largest component was for possible liability related to the lawsuit against the Infinity Q fund. The trustees said the set aside was needed. necessary because insurance held to cover litigation costs may not be sufficient and it does not cover certain costs, including those related to liquidations and government investigations.
As a result of this setting aside, Glickman said he only got back 30% of his investment.
Fund investors harmed in the alleged scam are also paying about $900,000 a month in costs, the filings show. Between June 2021 and February, that total comes to $7.24 million. “This can go on for a long time,” Glickman said. “If this case lasted three years, then $36 million would have disappeared right there.”
Glickman said he believes the SEC should appoint an independent team to manage the liquidation and disbursement of the fund, rather than allowing trustees present in the alleged fraud to oversee it.
An email to the fund’s trustees was not returned. Late last year, they approved the creation of a special committee consisting of two new trustees to investigate and pursue potential claims on behalf of the fund and its investors.
