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Founder of collapsed $1.7 billion mutual fund 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 fund asset values ​​to keep investor money flowing, then falsifying records to conceal the improprieties.

The Infinity Q Diversified Alpha Fund halted investor redemptions in February 2021, roughly seven years after it was co-founded by James Velissaris, 37, its chief investment officer. A government inquiry began, Velissaris stepped down and the mutual fund and a parallel hedge fund he oversaw began liquidating.

It was a rare example of a big mutual fund failure amid a roaring bull market. And the collapse ensnared billionaire investor David Bonderman, co-founder of TPG, a huge private-equity firm that went public this year. The Bonderman Family was a major investor in Infinity Q Capital Management, the investment company overseen by Velissaris, regulatory documents show. 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 certain times during 2020 when the pandemic was roiling the financial markets, the funds’ real values ​​were half what investors were told they were, prosecutors said. Certain positions held by the mutual fund “were reported at mathematically impossible valuations,” according to a civil complaint filed against Velissaris on Thursday by the Securities and Exchange Commission.

In addition to securities fraud and obstruction of justice, Velissaris has been charged with wire fraud and lying to auditors. Each charge carries a maximum sentence of 20 years in prison.

The SEC also accused Velissaris of pocketing $ 27 million in management fees generated by his improper valuation of the funds’ holdings. The SEC said its investigation into the debacle is continuing.

Mark Schonfeld, a lawyer at Gibson Dunn who represents Velissaris, provided this statement: “James managed investments at Infinity Q with the highest 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 the losses incurred by their irresponsible liquidation of the portfolio. “

A spokesman for Infinity Q Capital Management declined to comment.

The funds overseen by Velissaris were intended to generate returns that did not move in tandem with the overall stock and bond markets. Many of their holdings involved bets on exotic investments known as derivatives, because they are derived from other securities. The funds claimed annual returns of approximately 9.5 percent before they folded.

The Bonderman ties were a selling point for Infinity Q; a presentation from the fund boasted that its investors would gain access to the same “alternative investment strategies originally created” for the prosperous family. Last year, an Infinity Q Capital Management spokesman said the Bonderman family was a passive investor in the firm and had no control over its investments. The family lost “a substantial amount” in the collapse, the spokesman said. TPG, the private-equity firm cofounded by David Bonderman, did not respond to a request for comment from Bonderman on the prosecutors’ charges.

Prosecutors said the mispricing of assets took place from at least 2017 into 2021. Around March 2020, with the funds in a tailspin, 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 previous problems at the mutual fund. In 2016, the fund was late in filing a regulatory report because an independent pricing service had been unable to “support” some of its valuations. After that incident, the fund’s trustees, charged with overseeing it for investors, noted they had “worked closely” with Infinity Q Capital Management “to ensure that the appropriate source documentation for its valuation determinations were maintained, and the adviser’s trade allocation oversight was enhanced to better identify any errors or misallocations. “

Allegations that Velissaris manipulated returns and asset values ​​for four years after that incident indicate the fund’s trustees were providing inadequate oversight, said Marshall Glickman, an aggrieved investor in the Infinity Q fund. “Why was Velissaris in a position to misprice the assets for four years?” he asked.

Also disturbing, Glickman said, is the amount of investor money currently being held back by the fund trustees to cover litigation and other expenses incurred by the fund. Last year, the trustees set aside $ 750 million, saying the largest component was for possible liability in connection with litigation filed against the Infinity Q fund. The set-aside is necessary, the trustees said, because insurance held to cover lawsuit costs may be insufficient, and it does not cover certain expenses, including those associated with the liquidation and government investigations.

As a result of this set-aside, Glickman said he has received only 30 percent of his investment back.

Fund investors harmed in the alleged fraud are also paying out approximately $ 900,000 a month in expenses, records show. Between June 2021 and February, those expenses totaled $ 7.24 million. “This could drag on for a long time,” Glickman said. “If this case takes three years, that’s $ 36 million gone right there.”

Glickman said he believes the SEC should have appointed an independent group to manage the fund’s liquidation and disbursements, instead of allowing the trustees who were on hand during 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.

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