RiskNovember 15, 2022

Infinity Q Agrees to Settle SEC Overvaluation Charges

About $570 million to be returned to investors.

Reported by Michael Katz

Infinity Q Capital Management has agreed to settle Securities and Exchange Commission charges that the firm’s Diversified Alpha Mutual Fund mispriced its net asset value over four years “as part of a massive overvaluation scheme.”

According to the SEC’s complaint, from at least February 2017 through February 2021, the mutual fund’s reported NAVs were materially and falsely inflated due to a mismarking scheme led by Infinity Q Capital Management’s Chief Investment Officer, James Velissaris.

“Velissaris mismarked the mutual fund’s NAVs in order to inflate the reported value of the mutual fund to investors, to attract and retain capital and to increase his own compensation,” says the complaint.

Velissaris was charged by the SEC in February. Based on information learned by the SEC and shared with Infinity Q at the time, the firm informed the fund that Velissaris had been adjusting certain parameters within the third-party pricing model that affected the valuation of the swaps, and that it was unable to conclude that the adjustments were reasonable. It decided the best course of action for the fund’s shareholders was to liquidate the fund, determine the extent and impact of the historical valuation errors and return the maximum amount of proceeds to shareholders.

Infinity Q and the mutual fund’s board filed an application in February to suspend redemptions in the mutual fund, which was approved by the SEC. The mutual fund was liquidated, and approximately $670 million was distributed to current shareholders, with approximately $570 million remaining to be distributed to harmed investors, the regulator said.

The complaint cites an unsealed indictment that alleged Velissaris pulled off the overvaluation scheme by secretly altering inputs and manipulating the code of a third-party pricing service used to value the funds’ assets. Velissaris allegedly collected more than $26 million in profit distributions through his fraudulent conduct and without disclosing his activities to investors, according to the SEC.

The SEC said the mutual fund has agreed to settle the charges and consent to the appointment of a special master to oversee expenses paid from the mutual fund and administer a process to return the remaining funds to harmed investors. The settlement and the appointment of the special master are subject to court approval.