Infinity Q Investors Sue Founder of Collapsed $1.7 Billion Fund After Fraud Allegations | Lowenstein Sandler LLP

Investors in Infinity Q Capital Management’s (Infinity Q) funds filed a proposed class action lawsuit against the company last week after the fund’s founder was charged with securities fraud and obstruction of justice for allegedly inflated assets of over $1 billion and falsified records.

The lawsuit, which was filed last Thursday in U.S. District Court for the Eastern District of New York, alleges that the hedge fund and mutual fund “lost more than 40% of their respective values ​​after a forced liquidation by the SEC” in “one of the most egregious investment fund collapses in history.[1]

The proposed investor class accuses Infinity Q, the investment adviser who managed the funds, of manipulating the fund’s asset pricing methodology and overestimating the net asset value (NAV) of the funds from 2017 to 2021.[2] Investors allege that at the same time, Infinity Q intentionally misled investors by providing them with marketing materials touting robust fund valuation procedures, methodologies, monitoring and controls designed to ensure accurate pricing of the net asset value.[3]

Investors further allege that Infinity Q halted investor redemptions in February 2021, when at least two whistleblowers reported concerns about the funds to the SEC, prompting a formal and ongoing investigation. of the SEC and the liquidation by Infinity Q of the assets of the funds.[4] “As a result of these egregious acts, investors in the funds have been unable to withdraw their money from the funds, and investors are still waiting and wondering how much they will receive from the wreckage as the defendants continue to deplete available assets on legal defense costs. “, say the investors.[5]

The investors filed the suit the day after Infinity Q founder and former chief investment officer James Velissaris was criminally charged with securities fraud and obstruction of justice. According to the indictment, Velissaris manipulated the ratings for at least four years, creating results that were not only false but “mathematically impossible.”[6] The indictment also says that Velissaris tried to cover up the scheme by lying to auditors and altering term sheets and other counterparty documents for over-the-counter (OTC) derivative positions so that they appear support inflated values.[7]

On the same day as the indictment, the SEC and the Commodity Futures Trading Commission (CFTC) charged Velissaris with fraud in parallel civil actions. The SEC alleges that Velissaris and Infinity Q inflated the funds’ reported valuations by, among other things, manipulating computer code in the valuation models and knowingly entering incorrect data into what Velissaris told investors was a pricing service. independent third-party pricing.[8] Through this conduct, Velissaris significantly inflated the mutual fund’s net asset value and total private fund assets while pocketing more than $26 million in management fees, according to the SEC.[9]

The SEC further alleges that in doing so, Velissaris misled investors who likely would have requested redemptions had they known the funds’ actual performance, particularly given the market volatility during the COVID-19 pandemic.[10] Echoing these claims, the CFTC further asserts that Velissaris’ “false record of success” allowed Infinity Q to charge inflated fees, entice existing pool participants to invest more, and attract new investors. .[11]

The aforementioned court documents appear to collectively suggest that Velissaris and Infinity Q were able to carry out this scheme undetected for years due to the complexity of investing in the “alternative strategies” offered by Infinity Q. For example, OTC derivatives over-the-counter transactions, which made up a substantial portion of Infinity Q’s mutual funds and hedge funds, are contracts between private parties rather than trades made on a public exchange. As a result, even when market conditions were stable, investors had little opportunity to perform their own risk assessments or analyses, and were therefore highly dependent on Infinity Q’s purported expertise and methodologies. , the market turmoil caused by the COVID-19 pandemic has only increased the uncertainty surrounding these investments. It is therefore not surprising that Velissaris was able to exploit the “unprecedented market volatility” caused by the pandemic, during which “the scope and scale of fraud have increased”, according to the CFTC.[12]

The SEC and CFTC are seeking injunctions, civil monetary penalties, restitution, restitution, pre- and post-judgment interest, and prohibitions on trading, registration, and service as an officer or director against Velissaris. In the proposed class action, the investors seek, among other remedies, compensatory damages and rescission for all proposed class members who purchased securities issued by the funds from December 2018 through February 2021.

[1] Schiavi + Company LLC dba Schiavi + Dattani et al. v. Trust for Advised Portfolios et al.No. 1:22-cv-00896 at ¶ 2 (EDNY filed February 17, 2022). [2] Identifier. [3] Identifier. at 10. [4] Identifier. at 12. [5] Identifier. at ¶ 19. [6] United States vs. Velissaris#1:22-cr-00105 at ¶ 3 (SDNY February 17, 2022). [7] Identifier. at ¶ 5. [8] SEC against Valissaris, No. 1:22-cv-01345 at ¶¶ 3, 85 (SDNY filed February 17, 2022). [9] Identifier. at 12. [10] Identifier. at 6. [11] CFTC v. Valissaris, No. 1:22-cv-01347 at ¶ 3 (SDNY filed February 17, 2022). [12] Identifier. to 1.

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