By Amber Pavucsko, Staff Writer
As other funds were suffering the effects of the COVID-19 pandemic, Infinity Q’s funds were outperforming its competitors.[1] James Velissaris, the former Chief Investment Officer and founder of Infinity Q, was charged with fraud last month by U.S. authorities for inflating assets held in funds by more than $1 billion.[2] Velissaris was charged with wire fraud, securities fraud, lying to auditors, and obstruction of justice.[3] The funds’ investors also filed a class-action lawsuit against Infinity Q.[4] In an industry so heavily regulated, Velissaris’ conduct raises concerns on whether existing regulations are enough to prevent fraud in the future.
Velissaris oversaw and controlled a type of mutual fund known as Infinity Q Diversified Alpha Fund (The “Mutual Fund”).[5] Mutual funds operate by pooling investors’ money so they can more easily invest in assets like securities and bonds.[6] Mutual funds must be registered with the SEC. [7] Investors own shares in the fund and these shares are required by law to be priced each business day, typically after the major U.S. exchanges close.[8] Mutual funds are also required by law to disclose the procedures used when valuing shares.[9] This type of information is often included in the fund’s prospectus. A prospectus is a document required by the SEC that contains details about the fund to inform the public about the investment offering.[10] Infinity Q and Velissaris represented in disclosures that the fund would price shares by relying on independent pricing services to determine its “fair value” when market quotations were unavailable.[11]
The Mutual Fund operated quite differently than other mutual funds since the fund’s assets consisted mostly of private contracts that did not trade on public exchange markets.[12] This means the price of the shares cannot rely on market quotations and instead would have to rely on pricing services.[13] Investors could not easily conduct an independent analysis of the risks because the pricing was not based on publicly available information.[14] Investors had to rely on Infinity Q’s policies and procedures for the valuation of the price and the prevention of fraud. [15] The SEC alleges that Velissaris altered the price of the fund’s shares by manipulating the data he received from the independent pricing service.[16] Velissaris “cherry-pick[ed]” prices which inflated the value of the fund.[17] As one expert noted, one of the valuations was “mathematically impossible.”[18]
Despite Velissaris’ fraudulent practices, there are numerous ways mutual funds are protected against price manipulation. In all mutual funds, the Board is required to review and approve pricing policies.[19] Normally, the shares are priced consistently as they depend on the exchange market.[20] A pricing valuation committee is often available to accommodate for changes in the normal pricing of funds.[21] Here, the Mutual Fund could not rely on the normal pricing valuation based on the exchange market because of their unique makeup and thus the fund employed a third-party pricing service.[22] In Infinity Q, the pricing valuation committee rarely met, consisted of only three members, including Velissaris, and, when the SEC started investigating, Velissaris manipulated records indicating that the committee had actually met.[23] Managers like Velissaris have historically been able to manipulate data because of the inadequacy of the fund’s policies and procedures.
In the present suit, the procedures and policies of the fund were likely inadequate.[24] At many stages, Velissaris bypassed compliance measures and, as founder and Chief Investment Officer, had considerable control over the fund.[25]The SEC alleges that Velissaris consistently lied to the fund’s board, the chief compliance officer, compliance services, and the fund’s auditor.[26] While existing regulatory procedures are generally suitable to protect investors from pricing valuation mishaps, the unique nature of Infinity Q as a small fund, its engagement with private contracts, and its internal policies and procedures was not be enough to restrict and control such fraudulent activity.[27]
[1] https://www.wsj.com/articles/behind-the-mysterious-demise-of-a-1-7-billion-mutual-fund-11618911000
[2] U.S. v. Velissaris, No. 1:22-cr-00105 at 4 (S.D.N.Y. February 17, 2022).
[3] https://www.wsj.com/articles/infinity-q-investment-adviser-faces-securities-fraud-charges-11645125743?mod=Searchresults_pos2&page=1
[4] https://www.jdsupra.com/legalnews/infinity-q-investors-sue-founder-of-1644109/
[5] Velissaris, No. 1:22-cr-00105 at 7, 12.
[6] Id. at 8.
[7] Id.
[8] Id. at 8-9.
[9] Id. at 9.
[10] https://www.investopedia.com/terms/p/prospectus.asp
[11] Velissaris, at 14-17.
[12] Velissaris, at 15; https://www.jdsupra.com/legalnews/infinity-q-investors-sue-founder-of-1644109/
[13] Velissaris, at 15.
[14] https://www.jdsupra.com/legalnews/infinity-q-investors-sue-founder-of-1644109/
[15] Id.
[16] Velissaris, at 20-33.
[17] Id. at 33.
[18] https://www.wsj.com/articles/behind-the-mysterious-demise-of-a-1-7-billion-mutual-fund-11618911000
[19] https://www.sec.gov/divisions/investment/guidance/tyle120899.htm
[20] Joseph A. Franco & Karl-Otto Hartmann, Investment Management Regulation: An Introduction to Principles and Practice 1, 528 (2019).
[21] https://www.sec.gov/divisions/investment/guidance/tyle120899.htm
[22] Velissaris, at 2, 15-16.
[23] Id. at 13, 15, 49.
[24] See https://www.morningstar.com/articles/1027306/infinity-q-the-fund-that-checked-all-the-wrong-boxes; see also Velissaris, at 58-63; https://www.jdsupra.com/legalnews/infinity-q-investors-sue-founder-of-1644109/.
[25] Velissaris, at 13, 17-19.
[26] Id. at 17-19.
[27] https://www.morningstar.com/articles/1027306/infinity-q-the-fund-that-checked-all-the-wrong-boxes
