The founder of Infinity Q's attempts to conceal fraud were aided by the CCO.

The former chief investment officer and founder of New York-based investment adviser Infinity Q Capital Management faces criminal charges for his role in a scheme to defraud investors by overvaluing derivative swap positions, according to the DOJ.

According to the DOJ's indictment, James Velissaris was also charged with lying to auditors and obstructing an investigation by the Securities and Exchange Commission (SEC) with the help of Infinity Q's chief compliance and risk officer. There was no mention of the chief compliance and risk officer.

Velissaris was charged with securities fraud, wire fraud, lying to auditors, obstruction of justice, investment adviser fraud, and conspiracy to obstruct justice in the Southern District of New York. The first four charges each carry a maximum sentence of 20 years in prison, while the last two charges each carry a maximum sentence of five years. On Thursday morning, Velissaris surrendered to agents from the Federal Bureau of Investigation in Atlanta.

The SEC and the Commodity Futures Trading Commission both filed civil charges against Velissaris on Thursday (CFTC).

The specifics: Infinity Q began as a mutual fund in 2014, and in 2017 it became a hedge fund. Velissaris was in charge of the company until February 2021, when the SEC informed Infinity Q that it believed Velissaris had been incorrectly valuing derivatives. The SEC ordered the firm's mutual fund redemptions to be halted at the time.

According to the SEC, Velissaris engaged in an overvaluation scheme from at least 2017 to 2021 by "altering inputs and manipulating the code of a third-party pricing service used to value the funds' assets." According to the DOJ, Infinity Q claimed to use Bloomberg Valuations Service (BVAL) to calculate the fair value of these positions independently, but Velissaris made false entries in the system by secretly changing code that caused BVAL to alter and disregard certain critical terms.

The DOJ stated that "altering and disregarding terms in this fashion caused BVAL to report values that were artificially inflated and, often, much higher than fair value" According to the SEC, Velissaris made a profit of more than $26 million as a result of his alleged actions.

In a press release, U.S. Attorney Damian Williams stated, "as alleged, James Velissaris violated his obligation to put the interests of his investors before his own profits. "

Infinity Q liquidated the investment funds and sold derivative positions at a value that represented substantial losses to the investment funds' investors after learning of Velissaris' alleged activities in February 2021, according to the DOJ.

The deception: "elissaris tried to conceal his mismarking scheme, including from the Infinity Q funds’ independent auditor," according to the SEC. "For example, in connection with the Infinity Q funds’ audits, Velissaris forged transaction confirmation documents by changing the actual transaction terms in order to deceive the auditor into thinking that the funds’ valuations were reasonable."

According to the DOJ, the SEC launched an investigation into Infinity Q's valuation practices in May 2020, prompting Velissaris to enlist the help of the firm's chief compliance and risk officer to conceal his wrongdoings. According to the DOJ's indictment, the two altered documents, specifically materials addressing Infinity Q's valuation practices and policies, as well as misrepresented valuation committee meeting minutes. The alleged changes included removing language that stated "values are compared to the values provided by counterparties for reasonableness," because such a comparison would have revealed the alleged misconduct given the market's reaction to the Covid-19 pandemic.

The charges: Velissaris allegedly overvalued assets by more than $1 billion while pocketing tens of millions of dollars in fees, according to the SEC. Velissaris is accused of violating antifraud and other provisions of the federal securities laws, and the SEC is seeking permanent injunctive relief, the return of allegedly ill-gotten gains, civil penalties, and a public company officer-and-director bar in its complaint.

In a press release, Gurbir Grewal, director of the agency's Enforcement Division, said, "This case affirms our commitment to using all our tools to root out misconduct in the $18 trillion private fund arena, a growing market attracting more and more institutional investors, including public pension funds, university endowments, and charitable foundations."

The CFTC's complaint also highlighted how the scope and scale of Velissaris' alleged misconduct grew as the pandemic progressed. Velissaris is accused of defrauding pool participants and faces restitution, disgorgement of ill-gotten gains, civil monetary penalties, permanent registration and trading bans, and permanent injunctions.

In a press release, Acting Director of Enforcement Vincent McGonagle said, "This action demonstrates that the Commission will continue to focus on customer protection across the multifarious markets and products under its jurisdiction.  "Misvaluing financial instruments such as the swaps in this matter violates core provisions of the Commodity Exchange Act’s anti-fraud prohibitions, and the Commission will vigorously seek to prosecute such violations."

By fLEXI tEAM