Collapsed $1.7 billion Infinity Q mutual fund founder charged with fraud
The founder and manager of a $1.7 billion mutual fund that collapsed last year has been charged by federal prosecutors with securities fraud and obstruction of justice for allegedly inflating the value of the fund’s assets in order to circulate investors’ money, and then falsifying records to cover up the irregularities.
The Infinity Q Diversified Alpha Fund halted investor redemptions in February 2021, about seven years after it 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 be liquidated.
It was a rare example of a big mutual fund failing in the midst of a roaring bull market. And the collapse has ensnared billionaire investor David Bonderman, co-founder of TPG, a massive private equity firm that went public this year. The Bonderman family was a major investor in Infinity Q Capital Management, the investment firm overseen by Velissaris, according to regulatory filings. Velissaris had worked for the Bonderman family before co-founding Infinity Q Capital Management.
Prosecutors said Velissaris inflated the value of the funds’ holdings by $1 billion and manipulated the results for at least four years to mask poor performance. At times in 2020 when the pandemic rocked financial markets, actual fund values were half of what investors were told, prosecutors said. Some positions held by the mutual fund “have been flagged at mathematically impossible valuations,” 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 was charged with wire fraud and lying to auditors. Each count carries a maximum sentence of 20 years in prison.
The SEC also accused Velissaris of pocketing $27 million in management fees generated by its misvaluation of the funds’ holdings. The SEC said its investigation into the debacle is continuing.
Mark Schonfeld, attorney at Gibson Dunn representing Velissaris, said: “James has managed the investments at Infinity Q with the utmost integrity in accordance with all applicable principles. We look forward to vindicating James, who has been scapegoated by others who will have to answer in court for their own compliance failures and losses incurred from their irresponsible portfolio liquidation.
A spokesperson for Infinity Q Capital Management declined to comment.
The funds supervised by Velissaris were intended to generate returns that did not move in parallel with the general stock and bond markets. Many of their holdings involved betting on exotic investments known as derivatives because they are derived from other securities. The funds claimed annual returns of around 9.5% before pulling back.
Bonderman ties were a selling point for Infinity Q; a presentation of the fund boasted that its investors would have access to the same “alternative investment strategies originally created” for the successful family. Last year, a spokesperson for Infinity Q Capital Management said the Bonderman family were passive investors in the company and had no control over its investments. The family lost “a substantial sum” in the collapse, the spokesperson said. TPG, the private equity firm co-founded by David Bonderman, did not respond to a request for comment from Bonderman on the prosecutors’ charges.
Prosecutors said the misvaluation of assets took place from at least 2017 to 2021. Around March 2020, as funds plummeted, Velissaris sought a $100 million loan 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 portfolios echo the mutual fund’s earlier troubles. In 2016, the fund was slow to file a regulatory report because an independent pricing service was unable to “support” some of its valuations. After this incident, the fund’s administrators, responsible for overseeing it for investors, noted that they had “worked closely” with Infinity Q Capital Management “to ensure that appropriate source documentation for its valuation determinations is retained, and monitoring of the advisor’s transaction allocation has been strengthened to better identify errors or misallocations.
Allegations that Velissaris manipulated returns and asset values for four years after this incident indicate that the fund’s trustees provided inadequate oversight, said Marshall Glickman, an aggrieved investor in the Infinity Q fund. been able to misvalue the assets for four years? He asked.
The amount of investor money currently withheld by fund trustees to cover litigation and other expenses incurred by the fund is also troubling, Glickman said. Last year, administrators set aside $750 million, saying most of it was potential liability in litigation against the Infinity Q fund. directors, as insurance held to cover legal costs may be insufficient and may not cover certain expenses, including those associated with liquidation and government investigations.
As a result of this layaway, Glickman said he only recovered 30% of his investment.
Fund investors harmed in the alleged fraud also pay about $900,000 a month in expenses, records show. Between June 2021 and February, these expenditures totaled $7.24 million. “It could go on for a long time,” Glickman said. “If this case takes three years, that’s $36 million that’s gone there.”
Glickman said he thinks the SEC should have appointed an independent group to handle the liquidation and disbursements of the fund, instead of allowing administrators who were on site during the alleged fraud to oversee it.
An email to fund administrators was not returned. Late last year, they approved the creation of a special committee of two new directors to investigate and pursue potential claims on behalf of the fund and its investors.