By Michelle Price and Katanga Johnson
WASHINGTON (Reuters) -U.S. authorities filed criminal and civil charges against the founder and former chief investment officer of investment adviser Infinity Q Capital Management LLC, alleging he engaged in a fraudulent scheme to inflate the value of assets the firm advised.
Infinity Q was forced last year to liquidate its mutual funds after the U.S. Securities and Exchange Commission found that James Velissaris made potentially unreasonable adjustments to a pricing model used to value fund investments.
The Southern District of New York (SDNY) on Thursday also filed charges against Velissaris for inflating the value of the funds by $1 billion. As a result, he received management and performance fees -- totaling at least approximately $26.9 million since 2019 -- to which he was not entitled.
According to the SEC, Velissaris inflated the valuations by manipulating computer code in the third-party pricing service valuation models the company used to value the funds; he entered inputs he knew were incorrect into the pricing service; selected certain valuation models that he knew could not properly value the relevant positions; and knowingly cherry-picked one of the key valuation inputs.
"Velissaris' pricing manipulations materially inflated the mutual fund's net asset values and the private fund’s total assets, as well as reported performance," the SEC said in its charge.
"The manipulations were so pervasive that Velissaris could not keep up with his deceptions," it added.
He also falsified investor compliance manuals before providing them to investigators, the SDNY said in its charges, adding that Infinity Q and Velissaris disseminated materially false and misleading information to investors.
The Commodity Futures Trading Commission (CFTC) also filed a complaint in SDNY on Thursday similarly alleging Velissaris manipulated the pricing model to overvalue derivatives held by pooled funds.
Reuters could not immediately reach Velissaris for comment.
Mark Schonfeld, a lawyer for Velissaris, told Reuters that his client managed investments at Infinity Q with the "highest integrity."
"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," Schonfeld said.
Thursday's charges come amid a push by regulators to boost hedge fund and private equity fund disclosures in a bid to guard against fraud, increase oversight of the private funds industry and better monitor systemic risks.