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EXHIBIT 4
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RICHARD R. BEST
REGIONAL DIRECTOR
Adam Aderton*
Andrew Dean
Osman Nawaz*
Preethi Krishnamurthy
Joshua Brodsky
David H. Tutor
Attorneys for Plaintiff
SECURITIES AND EXCHANGE COMMISSION
New York Regional Office
Brookfield Place
200 Vesey Street, Suite 400
New York, New York 10281-1022
(212) 336-0024 (Tutor)
Email: TutorD@sec.gov
*Not admitted in U.S. District Court for the S.D.N.Y.
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
SECURITIES AND EXCHANGE
COMMISSION, COMPLAINT
Plaintiff, ____Civ. ____
-against- ECF CASE
JURY TRIAL DEMANDED
JAMES VELISSARIS,
Defendant.
Plaintiff Securities and Exchange Commission (“SEC”), for its Complaint against
Defendant James Velissaris (“Velissaris”), alleges as follows:
SUMMARY
1. Velissaris, the founder and former chief investment officer (“CIO”) of SEC-
registered investment adviser Infinity Q Capital Management LLC (“Infinity Q”), engaged in a
fraudulent scheme that inflated by more than $1 billion the value of assets held by a mutual fund
and a hedge fund that Infinity Q advised (collectively, the “Infinity Q Funds” or the “Funds”).
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2. From at least February 2017 through February 2021 (the “Relevant Period”),
Velissaris represented the Infinity Q valuation process to investors and others, including that
certain holdings of the Infinity Q Funds were valued by an “independent” third party pricing
service (the “Pricing Service”). In fact, Velissaris and Infinity Q did not follow that valuation
process. Velissaris was instead actively manipulating the valuation models available from the
Pricing Service and altering inputs to mask the poor performance of the Infinity Q Funds. This
allowed him to attract investor funds, keep investors from redeeming their investments, and
enrich himself through performance and management fees.
3. Unbeknownst to investors, Velissaris knowingly inflated the Infinity Q Funds’
stated valuations in at least four ways during the Relevant Period: Velissaris manipulated
computer code in the Pricing Service’s valuation models; entered inputs he knew were incorrect
into the Pricing Service; selected certain valuation models in the Pricing Service that he knew
could not properly value the relevant positions; and knowingly cherry-picked one of the key
valuation inputs.
4. Velissaris’s pricing manipulations materially inflated the mutual fund’s net asset
values (“NAVs”) and the private fund’s total assets, as well as the Funds’ reported performance,
and Infinity Q and Velissaris disseminated materially false and misleading information about the
Infinity Q Funds’ valuations, performance, and investment terms to investors.
5. Velissaris’s manipulations of the Infinity Q Funds’ valuations were so pervasive
that he could not keep up with his deceptions. At times, he had different valuations in the mutual
fund and the private fund for the same position. He also had the mutual fund report positions at
mathematically impossible valuations. In addition, Velissaris was aware that the Infinity Q
Funds’ counterparties were valuing the very same positions at massively different amounts.
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6. By March 2020, when faced with market volatility caused by the COVID-19
pandemic, Velissaris knew that the Infinity Q Funds were poorly positioned for increasing
market turmoil and that they were at risk of failing. Velissaris sought a $100 million cash
infusion from affiliates of Infinity Q’s partial owner, but the proposed loan was never made. In
response and to try to stave off the Infinity Q Funds’ failure, Velissaris stepped up his
manipulation of the valuations of positions held by the Infinity Q Funds, resulting in the
overvaluation of each of the Funds’ net assets by hundreds of millions of dollars. This
overvaluation attracted hundreds of millions of dollars in additional investments and forestalled
investor redemptions, all while some funds with similar investment strategies struggled or failed.
7. For example, as of the end of March 2020, as a result of Velissaris’s mismarking,
Infinity Q reported year-to-date returns for institutional class shares in the mutual fund of 8.95%,
one-year returns of 10.61%, three-year returns of 8.72%, and five-year returns of 7.28%. By
contrast, the hedge fund index to which Infinity Q compared itself (i.e., its benchmark) reported
year-to-date returns of negative 8.98% (that is, a loss of 8.98%), one-year returns of negative
4.32%, three-year returns of 0.36%, and five-year returns of 0.24%.
8. Meanwhile, Velissaris tried to conceal his mismarking scheme, including from the
Infinity Q Funds’ independent auditor. 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.
9. Velissaris also tried to obstruct the SEC staff during its investigation of Infinity Q.
For example, in response to an SEC request for documents, Velissaris altered and produced to
the SEC compliance manuals and private placement memoranda that differed from what had
been sent to investors in order to cover-up that the actual Infinity Q valuation policy was
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inconsistent with its practices. Velissaris also drafted and backdated valuation committee
minutes for meetings that never happened and then produced them to the SEC.
10. By September 2020, Velissaris’s fraudulent scheme had resulted in the
overvaluation of the Infinity Q Funds by over $1 billion.
11. By February 2021, when Infinity Q removed Velissaris from its management, the
Infinity Q Funds remained overvalued by at least hundreds of millions of dollars.
12. As a result of the Infinity Q Funds’ overvaluation, Velissaris received
management and performance fees—totaling at least approximately $26.9 million since 2019—
to which he was not entitled.
VIOLATIONS
13. By virtue of the foregoing conduct and as alleged further herein:
a. Velissaris violated Section 17(a) of the Securities Act of 1933 (“Securities Act”)
[15 U.S.C. § 77q(a)], Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”)
[15 U.S.C. § 78j(b)], and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5], Sections 206(1),
206(2), 206(4) and 207 of the Investment Advisers Act of 1940 (“Advisers Act”) [15 U.S.C. §§
80b-6(1), 80b-6(2), 80b-6(4), 80b-7], and Rule 206(4)-8 thereunder [17 C.F.R. § 275.206(4)-8],
and Sections 34(b) and 37 of the Investment Company Act of 1940 (“Investment Company Act”)
[15 U.S.C. §§ 80a-33(b), 80a-36];
b. In the alternative to the claim that Velissaris violated Exchange Act Section 10(b)
and Rule 10b-5 thereunder, Velissaris, as a control person of Infinity Q under Exchange Act
Section 20(a) [15 U.S.C. § 78t(a)], is liable for violations by Infinity Q of Exchange Act Section
10(b) and Rule 10b-5(b) thereunder;
c. Velissaris aided and abetted Infinity Q’s violations of Sections 17(a) of the
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Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5(a)-(c) thereunder, Sections
204(a), 206(1), 206(2), 206(4), and 207 of the Advisers Act and Rules 204-2(a), 206(4)-7, and
206(4)-8 thereunder, and Section 34(b) of the Investment Company Act, in violation of Section
15(b) of the Securities Act [15 U.S.C. § 77o(b)], Section 20(e) of the Exchange Act [15 U.S.C. §
78t(e)], Section 209(f) of the Advisers Act [15 U.S.C. § 80b-9(f)], and Section 48(b) of the
Investment Company Act [15 U.S.C. § 80a-47(b)]; and
d. Velissaris aided and abetted the Infinity Q Diversified Alpha Fund’s violations of
Rule 22c-1 under the Investment Company Act [17 C.F.R. § 270.22c-1], in violation of Section
48(b) of the Investment Company Act [15 U.S.C. § 80a-47(b)].
14. Unless Defendant is restrained and enjoined, he will engage in the acts, practices,
transactions, and courses of business set forth in this Complaint or in acts, practices, transactions,
and courses of business of similar type and object.
NATURE OF THE PROCEEDINGS AND RELIEF SOUGHT
15. The SEC brings this action pursuant to the authority conferred upon it by Section
20(b) of the Securities Act [15 U.S.C. § 77t(b)], Section 21(d) of the Exchange Act [15 U.S.C.
§ 78u(d)], Section 209(d) of the Advisers Act [15 U.S.C. § 80b-9(d)], and Section 42(d) of the
Investment Company Act [15 U.S.C. § 80a-41(d)].
16. The SEC seeks a final judgment: (a) permanently enjoining Defendant from
violating the federal securities laws and rules this Complaint alleges he has violated; (b) ordering
Defendant to disgorge all ill-gotten gains he received as a result of the violations alleged herein
and to pay prejudgment interest thereon; (c) ordering Defendant to pay civil money penalties
pursuant to Section 20(d) of the Securities Act [15 U.S.C. § 77t(d)], Section 21(d) of the
Exchange Act [15 U.S.C. § 78u(d)], Section 209(e) of the Advisers Act [15 U.S.C. § 80b-9(e)],
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and Section 42(e) of the Investment Company Act [15 U.S.C. § 80a-41(e)]; (d) permanently
prohibiting Defendant from serving as an officer or director of any company that has a class of
securities registered under Section 12 of the Exchange Act [15 U.S.C. § 78l] or that is required to
file reports under Section 15(d) of the Exchange Act [15 U.S.C. § 78o(d)], pursuant to
Section 21(d)(2) of the Exchange Act [15 U.S.C. § 78u(d)(2)]; and (e) ordering any other and
further relief the Court may deem appropriate or necessary.
JURISDICTION AND VENUE
17. This Court has jurisdiction over this action pursuant to Section 22(a) of the
Securities Act [15 U.S.C. § 77v(a)], Section 27 of the Exchange Act [15 U.S.C. § 78aa], Section
214 of the Advisers Act [15 U.S.C. § 80b-14], and Section 44 of the Investment Company Act
[15 U.S.C. § 80a–43].
18. Defendant has, directly and indirectly, made use of the means or instrumentalities
of interstate commerce or of the mails in connection with the transactions, acts, practices, and
courses of business alleged herein.
19. Venue lies in this District under Section 22(a) of the Securities Act [15 U.S.C.
§ 77v(a)], Section 27 of the Exchange Act [15 U.S.C. § 78aa], Section 214 of the Advisers Act
[15 U.S.C. § 80b-14], and Section 44 of the Investment Company Act [15 U.S.C. § 80a–43].
Certain of the acts, practices, transactions, and courses of business alleged herein occurred in this
District, where Infinity Q had its offices during the Relevant Period and at least one of
Defendant’s victims has its principal place of business and/or resides in this District.
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DEFENDANT
20. Velissaris, age 37, currently resides in Atlanta, Georgia. Velissaris was the
founder and CIO of Infinity Q and exercised control over Infinity Q during the Relevant Period
until he was removed on or about February 21, 2020. While Velissaris no longer manages
Infinity Q, he is the majority owner of Infinity Q Management Equity, LLC (“Infinity Q
Management Equity”), which is the majority owner of Infinity Q.
RELATED ENTITIES AND INDIVIDUAL
21. Infinity Q is registered with the SEC as an investment adviser and is
headquartered in New York, New York. Infinity Q was organized as a Delaware limited liability
company in 2014. Infinity Q advises a mutual fund, the Infinity Q Diversified Alpha Fund
mutual fund (Ticker: IQDNX) (the “Mutual Fund”), and a hedge fund, the Infinity Q
Volatility Alpha Fund, L.P. (Private Fund Identification Number 805-134725947) (collectively
with any feeder funds, the “Private Fund”). The Mutual Fund and the Private Fund are pooled
investment vehicles within the meaning of Rule 206(4)(b)-8(b), 17 C.F.R. § 275.206(4)-8(b).
22. Infinity Q’s principal owners are Infinity Q Management Equity and a limited
partnership (the “Limited Partnership”).
23. The Limited Partnership was the minority owner of Infinity Q. Infinity Q is
currently being managed by a representative of the Limited Partnership.
24. The Pricing Service is a premium service, offered by a financial services and
data company (the “Pricing Service Company”), which markets itself as providing a
comprehensive platform to structure and price derivatives, among other complex financial
instruments.
25. A multiple series Delaware statutory trust (the “Trust”) is registered under the
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Investment Company Act as an open-end series management investment company. See infra
Section I.A. The Trust purports to be a cost-efficient platform for mutual fund advisers by
providing a shared board, insurance, and other economies of scale for mutual funds. The Mutual
Fund is a series of the Trust.
26. The Board of the Trust (the “Board”) oversees the Mutual Fund.
27. A global fund administrator (the “Administrator”) serves as the Mutual Fund’s
administrator, fund accountant, and transfer agent. The Administrator also serves as the Mutual
Fund’s custodian and provides compliance services to the Infinity Q Funds.
28. An audit, accounting, advisory, and consulting firm (the “Auditor”) has served
as the Mutual Fund’s and the Private Fund’s auditor since 2018.
29. The chief compliance officer and chief risk officer of Infinity Q (the “CCO”)
joined Infinity Q in 2014. The CCO is a minority owner of Infinity Q Management Equity.
FACTS
I. Background
A. Mutual Funds, Private Funds, and Investment Advisers
1. Mutual Funds
30. A mutual fund is a type of SEC-registered investment company, or series thereof.
Investment companies pool money from many investors and invest the money in stocks, bonds,
short-term money-market instruments, other securities or assets, or some combination of these
investments. The combined securities and assets the investment company owns are known as its
portfolio. A mutual fund’s portfolio is managed by an SEC-registered investment adviser. A
mutual fund’s investment adviser owes a fiduciary duty to the fund. Each mutual fund share
represents an investor’s proportionate ownership of the mutual fund’s portfolio and the income
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and capital gains the portfolio generates.
31. Investors in mutual funds buy their shares from, and sell/redeem their shares to,
the mutual funds themselves. Mutual fund shares are typically purchased from the fund directly
or through investment professionals like brokers. Mutual funds are required by law to price their
shares each business day and they typically do so after the major U.S. exchanges close. This
price—the per-share value of the mutual fund’s assets minus its liabilities—is called the per
share net asset value or “per share NAV.” Mutual funds must sell and redeem their shares at the
per share NAV that is next calculated after the investor places a purchase or redemption order.
This means that, when an investor places a purchase or redemption order for mutual fund shares
during the day, the investor will not know what the purchase or redemption price is until the next
per share NAV is calculated.
32. A mutual fund is required under the Investment Company Act to calculate its
NAV using the market value of its portfolio securities when market quotations for those
securities are “readily available.” If a market quote for a security is not readily available, the fair
value of that security, as determined in good faith by the fund’s board, must be used in order to
calculate the NAV. A mutual fund’s prospectus, available to investors, often describes its
valuation procedures.
33. Mutual funds must comply with various disclosure requirements under the
Investment Company Act and, if they publicly offer shares, the Securities Act. For example,
Sections 30(a), (b), and (e) of Investment Company Act, and rules adopted thereunder, require
registered investment companies to file and/or transmit annual and semiannual reports to their
shareholders. Such shareholder reports generally must include portfolio holdings information and
more detailed financial statements than registration statements.
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2. Private Funds
34. Other investment pools may rely on one of the exclusions from the definition of
investment company set forth in Section 3 of the Investment Company Act. Investment pools
that rely on the exclusions set forth in Section(c)(1) and Section 3(c)(7) of the Investment
Company Act1 are often referred to as “private funds.” Some private funds are commonly known
as “hedge funds.”
35. Like mutual funds, private funds pool investors’ money and invest the money in
an effort to make a positive return.
36. Private funds are not subject to some of the regulations applicable to mutual
funds. Private funds, however, and their advisers, are subject to the same prohibitions against
fraud as are other market participants, and, like investment advisers to mutual funds, investment
advisers to private funds owe a fiduciary duty to the funds that they manage and are also subject
to anti-fraud prohibitions with respect to the private fund’s investors and prospective investors.
37. A private fund often discloses its valuation procedures in communications with
investors or prospective investors.
38. Whereas the mutual fund advisory fee structure is often based on a percentage of
assets under management, the private fund advisory fee structure typically includes both a
management fee (based on assets under management) and a performance fee (based on the
profits of the fund).
1
Section 3(c)(1) excepts from the definition of investment company any issuer whose outstanding securities (other
than short-term paper) are beneficially owned by not more than one hundred persons and that is not making and does
not at that time propose to make a public offering of such securities. Section 3(c)(7) excepts from the definition of
investment company any issuer whose outstanding securities are owned exclusively by persons who, at the time of
acquisition of such securities, are qualified purchasers and that is not making and does not at that time propose to
make a public offering of such securities. The term “qualified purchaser” is defined in Section 2(a)(51) of the
Investment Company Act.
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3. Investment Advisers
39. An investment adviser, under the Advisers Act, is any person that, for
compensation, engages in the business of providing investment advice to others, including a
mutual fund or private fund, about the value of or about investing in securities. Advisers that
manage portfolios provide ongoing advice about buying, selling and/or holding investments and,
in the context of an ongoing advisory relationship with a client and unless agreed otherwise, will
monitor the performance of the client’s investments and their alignment with the client’s overall
investment objectives and best interest.
B. Derivatives and Variance Swaps, Generally
40. Derivatives are financial instruments whose performance is derived, at least in
part, from the performance of an underlying asset, security, or index, among other things.
41. Over-the-counter (“OTC”) derivatives are contracts that are privately negotiated
between two counterparties without going through an exchange.
42. A swap is a type of derivative in which two counterparties agree to exchange or
“swap” payments with each other as a result of such things as changes in a stock price, interest
rate, commodity price, or even the volatility or variance of a financial instrument.
43. Volatility is a measure of the magnitude of price movement, either up or down, of
a financial instrument or another financial measure such as an index. Variance is the square of
volatility.
44. Generally, in a variance swap, at the time of the expiration of a position, the buyer
of the swap receives the amount of realized variance (i.e., the square of the realized volatility)
over a certain period, subject to certain conditions, multiplied by a notional dollar amount, if that
amount of realized variance is above the initially agreed upon price level (known as the strike
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price). If the amount of realized variance is below the initially agreed upon level determined by
the strike price, then the buyer of the swap must pay the seller the difference.
C. Infinity Q and the Infinity Q Funds
45. In approximately 2014, Velissaris, having worked at several well-known asset
managers and a prominent family office, sought to strike out on his own and started Infinity Q
with the goal of putting into practice his own investment approach.
46. Infinity Q is an investment adviser within the meaning of Section 202(a)(11) of
the Advisers Act, 15 U.S.C. § 80b-2(a)(11) and has been registered as an investment adviser with
the SEC since May 6, 2014.
47. Velissaris is also an investment adviser within the meaning of Section 202(a)(11)
of the Advisers Act. As the founder, indirect majority owner, and CIO of Infinity Q, Velissaris
had control over the firm. Velissaris also acted as an investment adviser to the Infinity Q Funds
in his individual capacity and received compensation for his services through the management
fees and performance fees paid by the Infinity Q Funds. Velissaris was promoted on Infinity Q’s
website and other marketing materials as the CIO of Infinity Q and held himself out as being in
the business of advising the Infinity Q Funds on investing in securities. Velissaris was also
primarily responsible for hiring Infinity Q personnel.
48. Infinity Q and Velissaris, as investment advisers to the Infinity Q Funds, owed a
fiduciary duty to the Infinity Q Funds.
49. At all relevant times through at least February 21, 2021, the date that he was
placed on administrative leave, Velissaris was responsible for all investment decisions of Infinity
Q.
50. During the Relevant Period, Infinity Q offered two main products, which held the
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majority of the assets advised by Infinity Q: (a) the Mutual Fund (launched in 2014); and (b) the
Private Fund (launched in 2017).
51. Through its Mutual Fund, Infinity Q sought to attract retail investors. The Mutual
Fund had thousands of investors, including at least one investor located in this District.
52. Through its Private Fund, Infinity Q sought to attract institutional investors,
which included public pension funds, university endowments, and charitable foundations, among
others. The Private Fund had dozens of investors, including at least one investor located in this
District.
53. Infinity Q represented in marketing materials that it offered retail investors
“access to the top tier investment strategies typically reserved for elite high net worth clients.”
54. Infinity Q further represented to investors in both the Mutual Fund and the Private
Fund that its “mandate” was “to provide positive absolute returns while having full liquidity and
low average correlation to equity and credit markets.”
55. The Mutual Fund’s and the Private Fund’s portfolios consisted primarily of cash
and a variety of equity and derivative positions, including swaps. The swaps held by the Infinity
Q Funds were predominately variance swaps, the value of which was tied to measures of
volatility.
56. Velissaris operated as the head trader at Infinity Q and was one of three members
of the Infinity Q valuation committee. In practice, there were no formal valuation committee
meetings since at least approximately 2018. Velissaris was the sole decision-maker at Infinity Q
for the valuation of the Mutual Fund’s and the Private Fund’s positions.
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II. Infinity Q’s Purported Valuation Process
A. Valuation Policies and Use of Pricing Service
57. In order to price the OTC derivative positions that constituted a significant portion
of the Funds, Velissaris, starting in approximately 2016, identified, retained, and started using
the Pricing Service—a well-known premium service that marketed itself as providing a
comprehensive platform to structure and price derivatives, among other complex financial
instruments.
58. By 2017, the Administrator directly accessed from the Pricing Service the values
generated through Velissaris’s use of the Pricing Service and used the reported values to
calculate and publish the Mutual Fund’s daily NAV and to calculate the Private Fund’s monthly
profit and loss report.
59. In offering documents, prospectuses, valuation policies, and other documents,
Velissaris and Infinity Q represented to the Funds’ current and prospective investors how they
would value the Funds’ assets, including how they would seek to “fair value” assets and use an
independent pricing service.
60. For example, Infinity Q represented that Infinity Q Funds’ assets were valued in
accordance with U.S. Generally accepted Accounting Principles (“GAAP”).
61. Accounting Standards Codification Topic 820 (“Topic 820”), Fair Value
Measurement, provides a framework for determining fair value in accordance with GAAP.
62. Topic 820 defines fair value (with the emphasis in the original) as “the price at
which an orderly transaction to sell the asset or to transfer the liability would take place between
market participants at the measurement date under current market conditions (that is, an exit
price at the measurement date from the perspective of a market participant that holds the asset or
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owns the liability).”
63. Infinity Q further represented to current and prospective investors in the Mutual
Fund and the Private Fund that Infinity Q and the Board had established valuation policies and
procedures to purportedly “fair value” portfolio holdings in accordance with the Infinity Q
Funds’ offering documents.
64. In the Mutual Fund’s 2017 and 2018 prospectuses, for example, Infinity Q
represented that “[w]hen market quotations are not readily available, a security or other asset is
valued at its fair value as determined under procedures approved by the Board.”
65. In the Mutual Fund’s prospectus dated December 31, 2019, for example, Infinity
Q represented:
Generally, the Fund’s investments are valued at market value or, in the
absence of a market value, at fair value as determined in good faith by
[Infinity Q] with oversight by the [valuation committee of the Trust]
pursuant to procedures approved by or under the direction of the Board.
Pursuant to those procedures, [Infinity Q] considers, among other things:
(1) the last sales price on the securities exchange, if any, on which a
security is primarily traded; (2) the mean between the bid and asked
prices; (3) price quotations from an approved pricing service; and (4) other
factors as necessary to determine a fair value under certain circumstances.
66. Many of the Infinity Q Funds’ OTC derivative positions, which constituted a
significant portion of the Funds, did not have readily available market prices. While the
settlement values of such positions are generally agreed upon by the parties at termination (i.e.,
because at that point volatility is fully realized, or known, to the parties), the Mutual Fund still
needed to value its OTC derivative positions on a daily basis to calculate the Mutual Fund’s
NAV, and the Private Fund needed to value the positions on at least a monthly basis to determine
its profit and loss report. As a result, Infinity Q’s valuation process would play a critical role in
valuing these positions prior to their termination.
67. The Infinity Q valuation policy was contained in its compliance manual and in the
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Private Fund private placement memorandum (“PPM”) that Infinity Q sent to and used to raise
funds from investors, from 2017 through May 2020.2 In its valuation policy, Infinity Q stated
that it utilized “independent sources, such as brokers or pricing services” to value the Private
Fund’s positions.
68. For the OTC derivatives held by the Private Fund, the Infinity Q valuation policy
further represented that it “utilizes [the Pricing Service], Broker Quotes, and Counterparty
Valuations to provide a fair value for these securities” (until Velissaris surreptitiously revised the
Infinity Q valuation policy in May 2020, as alleged below see infra Section IV.B).
69. The Infinity Q valuation policy further provided that “[a]t each month end,
valuations are compared to the values provided by counterparties for reasonableness,” and that
“[o]nce a price is established for a portfolio security, it shall be used for all Funds that hold the
security” (again until Velissaris surreptitiously revised the Infinity Q valuation policy in May
2020, as alleged below, see infra Section IV.B).
70. In its 2019 compliance manual, Infinity Q stated that it utilized “[p]ricing services
and broker dealers” in an “attempt to obtain a minimum of two independent prices” when trying
to “determine the fair value of the instrument,” and “[t]he final price for each position is
typically obtained by calculating the average of the external prices received.” The policy further
stated that “[w]hen multiple independent marks are available, Infinity Q does not mark any
securities higher than the average of the prices obtained.” To the extent the pricing service or
broker quotes “may not provide a reliable indication of fair value, Infinity Q will value such
[p]osition based on relevant information,” including internal or external models or other
2
Generally, a PPM is an offering document that introduces the investment and discloses information about the
securities offering and the issuer.
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appropriate factors. In these circumstances, “[a] written valuation memo/model shall be provided
for model-based prices explaining why the price used reflects fair value of the [p]osition,” unless
the position had “nominal value.” These provisions were also altered when Velissaris
surreptitiously revised the Infinity Q valuation policy in May 2020, as alleged below, see infra
Section IV.B.
71. In the Mutual Fund’s 2019 and 2020 annual reports and semi-annual reports,
Infinity Q further represented that the Mutual Fund “uses a pricing service to model price the
variance swap trades” and that the Pricing Service “uses quotes from brokers to estimate implied
volatility levels as an input to these models.”
72. In its required reporting on private funds on Form ADV for 2017 through 2020,
Infinity Q represented that 100% of the Private Fund’s assets were valued by a person who was
not a “related person” of Infinity Q.3
73. In or around March 2018, Velissaris was asked to review a draft of Infinity Q’s
Form ADV, which contained the statement that 100% of the Private Fund’s assets were valued
by a person who was not a “related person” of Infinity Q. On March 29, 2018, Velissaris replied
by email to that request and wrote: “Looks great. I have no updates.” After Velissaris’s sign-off,
the Form ADV was submitted the same day.
B. Velissaris Makes Additional Representations About Infinity Q’s Valuation
Process
74. Velissaris and others at Infinity Q repeatedly referred to Pricing Service-generated
valuations as “independent” prices in communications with, among others, investors, the Board,
3
Form ADV is the uniform form used by investment advisers to register with both the SEC and state securities
authorities.
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and the Auditor.
75. For example, in response to an August 2016 Board inquiry about Infinity Q’s use
of the Pricing Service to price OTC derivatives, Velissaris explained that Infinity Q “provide[s]
the term sheet, and [the Pricing Service] created the pricing model. We have not had any input
into [the Pricing Service’s] models, and they independently provide the values. [The Pricing
Service] also provided the code for the model at the onset for us to have a full understanding of
the methodology.”
76. In other correspondence with the Board in October 2016, Velissaris claimed that
the Mutual Fund’s “positions were valued independently by [the Pricing Service] team,” and
“[w]e were not involved in the valuation process.”
77. In April 2018, Velissaris edited a draft response for the CCO to send to
representatives of the Administrator, who had inquired about Infinity Q’s valuation process. The
draft response, after Velissaris’s edits, represented: “Infinity Q does not price any securities
ourselves. Prices are either provided by [the Pricing Service] directly to [the Administrator] for
non-vanilla OTC instruments or we forward [Pricing Service] values to [the Administrator] for
positions not requiring [Pricing Service] valuation.” This response was then sent by the CCO to
representatives of the Administrator with Velissaris copied. Representatives of the Administrator
replied to the CCO, with Velissaris copied, that the approach was acceptable to them as long as
Infinity Q was “complete and thorough in your summary.” The Administrator further stated that
“anything that is not downloaded directly from [the Pricing Service] is adviser priced even if you
use models on [the Pricing Service] to complete the valuations. This is due to Infinity Q still
having the ability to change inputs or calibrate any of the models.”
78. In April 2018, Velissaris informed the Auditor that Infinity Q’s variance and
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correlation swaps “are modeled independently by [the Pricing Service] and [the Pricing Service]
independently obtains broker implied volatility values (with no input from our team).” In
October 2018, Velissaris informed the Auditor that “[t]he [Pricing Service] team uses a
stochastic model to price these securities.”
79. Velissaris and Infinity Q also repeatedly told investors and provided them with
documents that indicated that Infinity Q had no role in the Pricing Service valuation process, that
the Pricing Service was independent from Infinity Q, and that the Administrator obtained values
directly from the Pricing Service with no Infinity Q involvement. For example, a 2019 due
diligence report prepared by a third-party diligence consultant on behalf of a potential investor in
the Private Fund, reported that Infinity Q represented that, “[i]n practice,” the Administrator, not
Infinity Q, “price[d] the book independently using [the Pricing Service].” According to Infinity
Q, “[w]hen trades are completed, [Infinity Q] sends [the Pricing Service] the details and [the
Pricing Service] will model the securities independent of [Infinity Q],” and Infinity Q “do[es] not
override [the Pricing Service].” The potential investor subsequently invested in the Private Fund.
80. Similarly, in May 2020, Velissaris told an investor that “[t]he valuation and
reporting for the mutual fund is conducted by [the Administrator].”
III. Velissaris’s Mismarking Scheme
81. The statements made by Velissaris and Infinity Q during the Relevant Period
about Infinity Q’s valuation process, including about the use of the Pricing Service, were false or
misleading. Velissaris knew or recklessly disregarded that he was, in fact, manipulating the
valuations of the Infinity Q Funds’ positions in the Pricing Service and was able to effectively set
the terms and edit computer code to produce valuations of positions at whatever level he desired.
82. There were three primary steps for Velissaris to price an OTC derivative position
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held by the Infinity Q Funds through the Pricing Service.
83. First, Velissaris was required to select, from among numerous models available
from the Pricing Service, a model appropriate for the position. For example, the Pricing Service
offered a basic valuation model for a “vanilla” variance swap and a different model for a
“corridor” variance swap, which model would take into account the corridors. See infra Section
III.A.1.
84. Second, upon selecting the appropriate model, Velissaris was required to enter the
terms of the transaction, as reflected in the term sheet or confirmation between Infinity Q and the
broker-dealer counterparty, into a user interface (“User Interface”). The User Interface for a
particular model included fields for the entry of the terms of the transaction. Once the terms were
entered into the fields, they then appeared in the Pricing Service’s User Interface.
85. After the terms of the transaction were entered into the available fields of the User
Interface, those terms were automatically mapped, or copied, onto the model’s underlying
computer code that ultimately calculated a valuation for the position (the “Underlying Valuation
Code”).
86. Finally, to the extent applicable for the position, Velissaris could select a
volatility surface or snapshot from a drop down menu of options available from the Pricing
Service. Volatility, which was derived from the volatility surface, was also a key input for many
Preview
FILED: NEW YORK COUNTY CLERK 02/07/2023 06:40 PM INDEX NO. 651295/2021 NYSCEF DOC. NO. 275 RECEIVED NYSCEF: 02/07/2023 EXHIBIT 4 FILED: NEW YORK COUNTY CLERK 02/07/2023 06:40 PM INDEX NO. 651295/2021 NYSCEF DOC. NO. 275 Case 1:22-cv-01346 Document 1 Filed 02/17/22 PageRECEIVED 1 of 65 NYSCEF: 02/07/2023 RICHARD R. BEST REGIONAL DIRECTOR Adam Aderton* Andrew Dean Osman Nawaz* Preethi Krishnamurthy Joshua Brodsky David H. Tutor Attorneys for Plaintiff SECURITIES AND EXCHANGE COMMISSION New York Regional Office Brookfield Place 200 Vesey Street, Suite 400 New York, New York 10281-1022 (212) 336-0024 (Tutor) Email: TutorD@sec.gov *Not admitted in U.S. District Court for the S.D.N.Y. UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK SECURITIES AND EXCHANGE COMMISSION, COMPLAINT Plaintiff, ____Civ. ____ -against- ECF CASE JURY TRIAL DEMANDED JAMES VELISSARIS, Defendant. Plaintiff Securities and Exchange Commission (“SEC”), for its Complaint against Defendant James Velissaris (“Velissaris”), alleges as follows: SUMMARY 1. Velissaris, the founder and former chief investment officer (“CIO”) of SEC- registered investment adviser Infinity Q Capital Management LLC (“Infinity Q”), engaged in a fraudulent scheme that inflated by more than $1 billion the value of assets held by a mutual fund and a hedge fund that Infinity Q advised (collectively, the “Infinity Q Funds” or the “Funds”). FILED: NEW YORK COUNTY CLERK 02/07/2023 06:40 PM INDEX NO. 651295/2021 NYSCEF DOC. NO. 275 Case 1:22-cv-01346 Document 1 Filed 02/17/22 PageRECEIVED 2 of 65 NYSCEF: 02/07/2023 2. From at least February 2017 through February 2021 (the “Relevant Period”), Velissaris represented the Infinity Q valuation process to investors and others, including that certain holdings of the Infinity Q Funds were valued by an “independent” third party pricing service (the “Pricing Service”). In fact, Velissaris and Infinity Q did not follow that valuation process. Velissaris was instead actively manipulating the valuation models available from the Pricing Service and altering inputs to mask the poor performance of the Infinity Q Funds. This allowed him to attract investor funds, keep investors from redeeming their investments, and enrich himself through performance and management fees. 3. Unbeknownst to investors, Velissaris knowingly inflated the Infinity Q Funds’ stated valuations in at least four ways during the Relevant Period: Velissaris manipulated computer code in the Pricing Service’s valuation models; entered inputs he knew were incorrect into the Pricing Service; selected certain valuation models in the Pricing Service that he knew could not properly value the relevant positions; and knowingly cherry-picked one of the key valuation inputs. 4. Velissaris’s pricing manipulations materially inflated the mutual fund’s net asset values (“NAVs”) and the private fund’s total assets, as well as the Funds’ reported performance, and Infinity Q and Velissaris disseminated materially false and misleading information about the Infinity Q Funds’ valuations, performance, and investment terms to investors. 5. Velissaris’s manipulations of the Infinity Q Funds’ valuations were so pervasive that he could not keep up with his deceptions. At times, he had different valuations in the mutual fund and the private fund for the same position. He also had the mutual fund report positions at mathematically impossible valuations. In addition, Velissaris was aware that the Infinity Q Funds’ counterparties were valuing the very same positions at massively different amounts. 2 FILED: NEW YORK COUNTY CLERK 02/07/2023 06:40 PM INDEX NO. 651295/2021 NYSCEF DOC. NO. 275 Case 1:22-cv-01346 Document 1 Filed 02/17/22 PageRECEIVED 3 of 65 NYSCEF: 02/07/2023 6. By March 2020, when faced with market volatility caused by the COVID-19 pandemic, Velissaris knew that the Infinity Q Funds were poorly positioned for increasing market turmoil and that they were at risk of failing. Velissaris sought a $100 million cash infusion from affiliates of Infinity Q’s partial owner, but the proposed loan was never made. In response and to try to stave off the Infinity Q Funds’ failure, Velissaris stepped up his manipulation of the valuations of positions held by the Infinity Q Funds, resulting in the overvaluation of each of the Funds’ net assets by hundreds of millions of dollars. This overvaluation attracted hundreds of millions of dollars in additional investments and forestalled investor redemptions, all while some funds with similar investment strategies struggled or failed. 7. For example, as of the end of March 2020, as a result of Velissaris’s mismarking, Infinity Q reported year-to-date returns for institutional class shares in the mutual fund of 8.95%, one-year returns of 10.61%, three-year returns of 8.72%, and five-year returns of 7.28%. By contrast, the hedge fund index to which Infinity Q compared itself (i.e., its benchmark) reported year-to-date returns of negative 8.98% (that is, a loss of 8.98%), one-year returns of negative 4.32%, three-year returns of 0.36%, and five-year returns of 0.24%. 8. Meanwhile, Velissaris tried to conceal his mismarking scheme, including from the Infinity Q Funds’ independent auditor. 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. 9. Velissaris also tried to obstruct the SEC staff during its investigation of Infinity Q. For example, in response to an SEC request for documents, Velissaris altered and produced to the SEC compliance manuals and private placement memoranda that differed from what had been sent to investors in order to cover-up that the actual Infinity Q valuation policy was 3 FILED: NEW YORK COUNTY CLERK 02/07/2023 06:40 PM INDEX NO. 651295/2021 NYSCEF DOC. NO. 275 Case 1:22-cv-01346 Document 1 Filed 02/17/22 PageRECEIVED 4 of 65 NYSCEF: 02/07/2023 inconsistent with its practices. Velissaris also drafted and backdated valuation committee minutes for meetings that never happened and then produced them to the SEC. 10. By September 2020, Velissaris’s fraudulent scheme had resulted in the overvaluation of the Infinity Q Funds by over $1 billion. 11. By February 2021, when Infinity Q removed Velissaris from its management, the Infinity Q Funds remained overvalued by at least hundreds of millions of dollars. 12. As a result of the Infinity Q Funds’ overvaluation, Velissaris received management and performance fees—totaling at least approximately $26.9 million since 2019— to which he was not entitled. VIOLATIONS 13. By virtue of the foregoing conduct and as alleged further herein: a. Velissaris violated Section 17(a) of the Securities Act of 1933 (“Securities Act”) [15 U.S.C. § 77q(a)], Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) [15 U.S.C. § 78j(b)], and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5], Sections 206(1), 206(2), 206(4) and 207 of the Investment Advisers Act of 1940 (“Advisers Act”) [15 U.S.C. §§ 80b-6(1), 80b-6(2), 80b-6(4), 80b-7], and Rule 206(4)-8 thereunder [17 C.F.R. § 275.206(4)-8], and Sections 34(b) and 37 of the Investment Company Act of 1940 (“Investment Company Act”) [15 U.S.C. §§ 80a-33(b), 80a-36]; b. In the alternative to the claim that Velissaris violated Exchange Act Section 10(b) and Rule 10b-5 thereunder, Velissaris, as a control person of Infinity Q under Exchange Act Section 20(a) [15 U.S.C. § 78t(a)], is liable for violations by Infinity Q of Exchange Act Section 10(b) and Rule 10b-5(b) thereunder; c. Velissaris aided and abetted Infinity Q’s violations of Sections 17(a) of the 4 FILED: NEW YORK COUNTY CLERK 02/07/2023 06:40 PM INDEX NO. 651295/2021 NYSCEF DOC. NO. 275 Case 1:22-cv-01346 Document 1 Filed 02/17/22 PageRECEIVED 5 of 65 NYSCEF: 02/07/2023 Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5(a)-(c) thereunder, Sections 204(a), 206(1), 206(2), 206(4), and 207 of the Advisers Act and Rules 204-2(a), 206(4)-7, and 206(4)-8 thereunder, and Section 34(b) of the Investment Company Act, in violation of Section 15(b) of the Securities Act [15 U.S.C. § 77o(b)], Section 20(e) of the Exchange Act [15 U.S.C. § 78t(e)], Section 209(f) of the Advisers Act [15 U.S.C. § 80b-9(f)], and Section 48(b) of the Investment Company Act [15 U.S.C. § 80a-47(b)]; and d. Velissaris aided and abetted the Infinity Q Diversified Alpha Fund’s violations of Rule 22c-1 under the Investment Company Act [17 C.F.R. § 270.22c-1], in violation of Section 48(b) of the Investment Company Act [15 U.S.C. § 80a-47(b)]. 14. Unless Defendant is restrained and enjoined, he will engage in the acts, practices, transactions, and courses of business set forth in this Complaint or in acts, practices, transactions, and courses of business of similar type and object. NATURE OF THE PROCEEDINGS AND RELIEF SOUGHT 15. The SEC brings this action pursuant to the authority conferred upon it by Section 20(b) of the Securities Act [15 U.S.C. § 77t(b)], Section 21(d) of the Exchange Act [15 U.S.C. § 78u(d)], Section 209(d) of the Advisers Act [15 U.S.C. § 80b-9(d)], and Section 42(d) of the Investment Company Act [15 U.S.C. § 80a-41(d)]. 16. The SEC seeks a final judgment: (a) permanently enjoining Defendant from violating the federal securities laws and rules this Complaint alleges he has violated; (b) ordering Defendant to disgorge all ill-gotten gains he received as a result of the violations alleged herein and to pay prejudgment interest thereon; (c) ordering Defendant to pay civil money penalties pursuant to Section 20(d) of the Securities Act [15 U.S.C. § 77t(d)], Section 21(d) of the Exchange Act [15 U.S.C. § 78u(d)], Section 209(e) of the Advisers Act [15 U.S.C. § 80b-9(e)], 5 FILED: NEW YORK COUNTY CLERK 02/07/2023 06:40 PM INDEX NO. 651295/2021 NYSCEF DOC. NO. 275 Case 1:22-cv-01346 Document 1 Filed 02/17/22 PageRECEIVED 6 of 65 NYSCEF: 02/07/2023 and Section 42(e) of the Investment Company Act [15 U.S.C. § 80a-41(e)]; (d) permanently prohibiting Defendant from serving as an officer or director of any company that has a class of securities registered under Section 12 of the Exchange Act [15 U.S.C. § 78l] or that is required to file reports under Section 15(d) of the Exchange Act [15 U.S.C. § 78o(d)], pursuant to Section 21(d)(2) of the Exchange Act [15 U.S.C. § 78u(d)(2)]; and (e) ordering any other and further relief the Court may deem appropriate or necessary. JURISDICTION AND VENUE 17. This Court has jurisdiction over this action pursuant to Section 22(a) of the Securities Act [15 U.S.C. § 77v(a)], Section 27 of the Exchange Act [15 U.S.C. § 78aa], Section 214 of the Advisers Act [15 U.S.C. § 80b-14], and Section 44 of the Investment Company Act [15 U.S.C. § 80a–43]. 18. Defendant has, directly and indirectly, made use of the means or instrumentalities of interstate commerce or of the mails in connection with the transactions, acts, practices, and courses of business alleged herein. 19. Venue lies in this District under Section 22(a) of the Securities Act [15 U.S.C. § 77v(a)], Section 27 of the Exchange Act [15 U.S.C. § 78aa], Section 214 of the Advisers Act [15 U.S.C. § 80b-14], and Section 44 of the Investment Company Act [15 U.S.C. § 80a–43]. Certain of the acts, practices, transactions, and courses of business alleged herein occurred in this District, where Infinity Q had its offices during the Relevant Period and at least one of Defendant’s victims has its principal place of business and/or resides in this District. 6 FILED: NEW YORK COUNTY CLERK 02/07/2023 06:40 PM INDEX NO. 651295/2021 NYSCEF DOC. NO. 275 Case 1:22-cv-01346 Document 1 Filed 02/17/22 PageRECEIVED 7 of 65 NYSCEF: 02/07/2023 DEFENDANT 20. Velissaris, age 37, currently resides in Atlanta, Georgia. Velissaris was the founder and CIO of Infinity Q and exercised control over Infinity Q during the Relevant Period until he was removed on or about February 21, 2020. While Velissaris no longer manages Infinity Q, he is the majority owner of Infinity Q Management Equity, LLC (“Infinity Q Management Equity”), which is the majority owner of Infinity Q. RELATED ENTITIES AND INDIVIDUAL 21. Infinity Q is registered with the SEC as an investment adviser and is headquartered in New York, New York. Infinity Q was organized as a Delaware limited liability company in 2014. Infinity Q advises a mutual fund, the Infinity Q Diversified Alpha Fund mutual fund (Ticker: IQDNX) (the “Mutual Fund”), and a hedge fund, the Infinity Q Volatility Alpha Fund, L.P. (Private Fund Identification Number 805-134725947) (collectively with any feeder funds, the “Private Fund”). The Mutual Fund and the Private Fund are pooled investment vehicles within the meaning of Rule 206(4)(b)-8(b), 17 C.F.R. § 275.206(4)-8(b). 22. Infinity Q’s principal owners are Infinity Q Management Equity and a limited partnership (the “Limited Partnership”). 23. The Limited Partnership was the minority owner of Infinity Q. Infinity Q is currently being managed by a representative of the Limited Partnership. 24. The Pricing Service is a premium service, offered by a financial services and data company (the “Pricing Service Company”), which markets itself as providing a comprehensive platform to structure and price derivatives, among other complex financial instruments. 25. A multiple series Delaware statutory trust (the “Trust”) is registered under the 7 FILED: NEW YORK COUNTY CLERK 02/07/2023 06:40 PM INDEX NO. 651295/2021 NYSCEF DOC. NO. 275 Case 1:22-cv-01346 Document 1 Filed 02/17/22 PageRECEIVED 8 of 65 NYSCEF: 02/07/2023 Investment Company Act as an open-end series management investment company. See infra Section I.A. The Trust purports to be a cost-efficient platform for mutual fund advisers by providing a shared board, insurance, and other economies of scale for mutual funds. The Mutual Fund is a series of the Trust. 26. The Board of the Trust (the “Board”) oversees the Mutual Fund. 27. A global fund administrator (the “Administrator”) serves as the Mutual Fund’s administrator, fund accountant, and transfer agent. The Administrator also serves as the Mutual Fund’s custodian and provides compliance services to the Infinity Q Funds. 28. An audit, accounting, advisory, and consulting firm (the “Auditor”) has served as the Mutual Fund’s and the Private Fund’s auditor since 2018. 29. The chief compliance officer and chief risk officer of Infinity Q (the “CCO”) joined Infinity Q in 2014. The CCO is a minority owner of Infinity Q Management Equity. FACTS I. Background A. Mutual Funds, Private Funds, and Investment Advisers 1. Mutual Funds 30. A mutual fund is a type of SEC-registered investment company, or series thereof. Investment companies pool money from many investors and invest the money in stocks, bonds, short-term money-market instruments, other securities or assets, or some combination of these investments. The combined securities and assets the investment company owns are known as its portfolio. A mutual fund’s portfolio is managed by an SEC-registered investment adviser. A mutual fund’s investment adviser owes a fiduciary duty to the fund. Each mutual fund share represents an investor’s proportionate ownership of the mutual fund’s portfolio and the income 8 FILED: NEW YORK COUNTY CLERK 02/07/2023 06:40 PM INDEX NO. 651295/2021 NYSCEF DOC. NO. 275 Case 1:22-cv-01346 Document 1 Filed 02/17/22 PageRECEIVED 9 of 65 NYSCEF: 02/07/2023 and capital gains the portfolio generates. 31. Investors in mutual funds buy their shares from, and sell/redeem their shares to, the mutual funds themselves. Mutual fund shares are typically purchased from the fund directly or through investment professionals like brokers. Mutual funds are required by law to price their shares each business day and they typically do so after the major U.S. exchanges close. This price—the per-share value of the mutual fund’s assets minus its liabilities—is called the per share net asset value or “per share NAV.” Mutual funds must sell and redeem their shares at the per share NAV that is next calculated after the investor places a purchase or redemption order. This means that, when an investor places a purchase or redemption order for mutual fund shares during the day, the investor will not know what the purchase or redemption price is until the next per share NAV is calculated. 32. A mutual fund is required under the Investment Company Act to calculate its NAV using the market value of its portfolio securities when market quotations for those securities are “readily available.” If a market quote for a security is not readily available, the fair value of that security, as determined in good faith by the fund’s board, must be used in order to calculate the NAV. A mutual fund’s prospectus, available to investors, often describes its valuation procedures. 33. Mutual funds must comply with various disclosure requirements under the Investment Company Act and, if they publicly offer shares, the Securities Act. For example, Sections 30(a), (b), and (e) of Investment Company Act, and rules adopted thereunder, require registered investment companies to file and/or transmit annual and semiannual reports to their shareholders. Such shareholder reports generally must include portfolio holdings information and more detailed financial statements than registration statements. 9 FILED: NEW YORK COUNTY CLERK 02/07/2023 06:40 PM INDEX NO. 651295/2021 NYSCEF DOC. NO. 275 Case 1:22-cv-01346 Document 1 Filed 02/17/22 Page RECEIVED 10 of 65 NYSCEF: 02/07/2023 2. Private Funds 34. Other investment pools may rely on one of the exclusions from the definition of investment company set forth in Section 3 of the Investment Company Act. Investment pools that rely on the exclusions set forth in Section(c)(1) and Section 3(c)(7) of the Investment Company Act1 are often referred to as “private funds.” Some private funds are commonly known as “hedge funds.” 35. Like mutual funds, private funds pool investors’ money and invest the money in an effort to make a positive return. 36. Private funds are not subject to some of the regulations applicable to mutual funds. Private funds, however, and their advisers, are subject to the same prohibitions against fraud as are other market participants, and, like investment advisers to mutual funds, investment advisers to private funds owe a fiduciary duty to the funds that they manage and are also subject to anti-fraud prohibitions with respect to the private fund’s investors and prospective investors. 37. A private fund often discloses its valuation procedures in communications with investors or prospective investors. 38. Whereas the mutual fund advisory fee structure is often based on a percentage of assets under management, the private fund advisory fee structure typically includes both a management fee (based on assets under management) and a performance fee (based on the profits of the fund). 1 Section 3(c)(1) excepts from the definition of investment company any issuer whose outstanding securities (other than short-term paper) are beneficially owned by not more than one hundred persons and that is not making and does not at that time propose to make a public offering of such securities. Section 3(c)(7) excepts from the definition of investment company any issuer whose outstanding securities are owned exclusively by persons who, at the time of acquisition of such securities, are qualified purchasers and that is not making and does not at that time propose to make a public offering of such securities. The term “qualified purchaser” is defined in Section 2(a)(51) of the Investment Company Act. 10 FILED: NEW YORK COUNTY CLERK 02/07/2023 06:40 PM INDEX NO. 651295/2021 NYSCEF DOC. NO. 275 Case 1:22-cv-01346 Document 1 Filed 02/17/22 Page RECEIVED 11 of 65 NYSCEF: 02/07/2023 3. Investment Advisers 39. An investment adviser, under the Advisers Act, is any person that, for compensation, engages in the business of providing investment advice to others, including a mutual fund or private fund, about the value of or about investing in securities. Advisers that manage portfolios provide ongoing advice about buying, selling and/or holding investments and, in the context of an ongoing advisory relationship with a client and unless agreed otherwise, will monitor the performance of the client’s investments and their alignment with the client’s overall investment objectives and best interest. B. Derivatives and Variance Swaps, Generally 40. Derivatives are financial instruments whose performance is derived, at least in part, from the performance of an underlying asset, security, or index, among other things. 41. Over-the-counter (“OTC”) derivatives are contracts that are privately negotiated between two counterparties without going through an exchange. 42. A swap is a type of derivative in which two counterparties agree to exchange or “swap” payments with each other as a result of such things as changes in a stock price, interest rate, commodity price, or even the volatility or variance of a financial instrument. 43. Volatility is a measure of the magnitude of price movement, either up or down, of a financial instrument or another financial measure such as an index. Variance is the square of volatility. 44. Generally, in a variance swap, at the time of the expiration of a position, the buyer of the swap receives the amount of realized variance (i.e., the square of the realized volatility) over a certain period, subject to certain conditions, multiplied by a notional dollar amount, if that amount of realized variance is above the initially agreed upon price level (known as the strike 11 FILED: NEW YORK COUNTY CLERK 02/07/2023 06:40 PM INDEX NO. 651295/2021 NYSCEF DOC. NO. 275 Case 1:22-cv-01346 Document 1 Filed 02/17/22 Page RECEIVED 12 of 65 NYSCEF: 02/07/2023 price). If the amount of realized variance is below the initially agreed upon level determined by the strike price, then the buyer of the swap must pay the seller the difference. C. Infinity Q and the Infinity Q Funds 45. In approximately 2014, Velissaris, having worked at several well-known asset managers and a prominent family office, sought to strike out on his own and started Infinity Q with the goal of putting into practice his own investment approach. 46. Infinity Q is an investment adviser within the meaning of Section 202(a)(11) of the Advisers Act, 15 U.S.C. § 80b-2(a)(11) and has been registered as an investment adviser with the SEC since May 6, 2014. 47. Velissaris is also an investment adviser within the meaning of Section 202(a)(11) of the Advisers Act. As the founder, indirect majority owner, and CIO of Infinity Q, Velissaris had control over the firm. Velissaris also acted as an investment adviser to the Infinity Q Funds in his individual capacity and received compensation for his services through the management fees and performance fees paid by the Infinity Q Funds. Velissaris was promoted on Infinity Q’s website and other marketing materials as the CIO of Infinity Q and held himself out as being in the business of advising the Infinity Q Funds on investing in securities. Velissaris was also primarily responsible for hiring Infinity Q personnel. 48. Infinity Q and Velissaris, as investment advisers to the Infinity Q Funds, owed a fiduciary duty to the Infinity Q Funds. 49. At all relevant times through at least February 21, 2021, the date that he was placed on administrative leave, Velissaris was responsible for all investment decisions of Infinity Q. 50. During the Relevant Period, Infinity Q offered two main products, which held the 12 FILED: NEW YORK COUNTY CLERK 02/07/2023 06:40 PM INDEX NO. 651295/2021 NYSCEF DOC. NO. 275 Case 1:22-cv-01346 Document 1 Filed 02/17/22 Page RECEIVED 13 of 65 NYSCEF: 02/07/2023 majority of the assets advised by Infinity Q: (a) the Mutual Fund (launched in 2014); and (b) the Private Fund (launched in 2017). 51. Through its Mutual Fund, Infinity Q sought to attract retail investors. The Mutual Fund had thousands of investors, including at least one investor located in this District. 52. Through its Private Fund, Infinity Q sought to attract institutional investors, which included public pension funds, university endowments, and charitable foundations, among others. The Private Fund had dozens of investors, including at least one investor located in this District. 53. Infinity Q represented in marketing materials that it offered retail investors “access to the top tier investment strategies typically reserved for elite high net worth clients.” 54. Infinity Q further represented to investors in both the Mutual Fund and the Private Fund that its “mandate” was “to provide positive absolute returns while having full liquidity and low average correlation to equity and credit markets.” 55. The Mutual Fund’s and the Private Fund’s portfolios consisted primarily of cash and a variety of equity and derivative positions, including swaps. The swaps held by the Infinity Q Funds were predominately variance swaps, the value of which was tied to measures of volatility. 56. Velissaris operated as the head trader at Infinity Q and was one of three members of the Infinity Q valuation committee. In practice, there were no formal valuation committee meetings since at least approximately 2018. Velissaris was the sole decision-maker at Infinity Q for the valuation of the Mutual Fund’s and the Private Fund’s positions. 13 FILED: NEW YORK COUNTY CLERK 02/07/2023 06:40 PM INDEX NO. 651295/2021 NYSCEF DOC. NO. 275 Case 1:22-cv-01346 Document 1 Filed 02/17/22 Page RECEIVED 14 of 65 NYSCEF: 02/07/2023 II. Infinity Q’s Purported Valuation Process A. Valuation Policies and Use of Pricing Service 57. In order to price the OTC derivative positions that constituted a significant portion of the Funds, Velissaris, starting in approximately 2016, identified, retained, and started using the Pricing Service—a well-known premium service that marketed itself as providing a comprehensive platform to structure and price derivatives, among other complex financial instruments. 58. By 2017, the Administrator directly accessed from the Pricing Service the values generated through Velissaris’s use of the Pricing Service and used the reported values to calculate and publish the Mutual Fund’s daily NAV and to calculate the Private Fund’s monthly profit and loss report. 59. In offering documents, prospectuses, valuation policies, and other documents, Velissaris and Infinity Q represented to the Funds’ current and prospective investors how they would value the Funds’ assets, including how they would seek to “fair value” assets and use an independent pricing service. 60. For example, Infinity Q represented that Infinity Q Funds’ assets were valued in accordance with U.S. Generally accepted Accounting Principles (“GAAP”). 61. Accounting Standards Codification Topic 820 (“Topic 820”), Fair Value Measurement, provides a framework for determining fair value in accordance with GAAP. 62. Topic 820 defines fair value (with the emphasis in the original) as “the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions (that is, an exit price at the measurement date from the perspective of a market participant that holds the asset or 14 FILED: NEW YORK COUNTY CLERK 02/07/2023 06:40 PM INDEX NO. 651295/2021 NYSCEF DOC. NO. 275 Case 1:22-cv-01346 Document 1 Filed 02/17/22 Page RECEIVED 15 of 65 NYSCEF: 02/07/2023 owns the liability).” 63. Infinity Q further represented to current and prospective investors in the Mutual Fund and the Private Fund that Infinity Q and the Board had established valuation policies and procedures to purportedly “fair value” portfolio holdings in accordance with the Infinity Q Funds’ offering documents. 64. In the Mutual Fund’s 2017 and 2018 prospectuses, for example, Infinity Q represented that “[w]hen market quotations are not readily available, a security or other asset is valued at its fair value as determined under procedures approved by the Board.” 65. In the Mutual Fund’s prospectus dated December 31, 2019, for example, Infinity Q represented: Generally, the Fund’s investments are valued at market value or, in the absence of a market value, at fair value as determined in good faith by [Infinity Q] with oversight by the [valuation committee of the Trust] pursuant to procedures approved by or under the direction of the Board. Pursuant to those procedures, [Infinity Q] considers, among other things: (1) the last sales price on the securities exchange, if any, on which a security is primarily traded; (2) the mean between the bid and asked prices; (3) price quotations from an approved pricing service; and (4) other factors as necessary to determine a fair value under certain circumstances. 66. Many of the Infinity Q Funds’ OTC derivative positions, which constituted a significant portion of the Funds, did not have readily available market prices. While the settlement values of such positions are generally agreed upon by the parties at termination (i.e., because at that point volatility is fully realized, or known, to the parties), the Mutual Fund still needed to value its OTC derivative positions on a daily basis to calculate the Mutual Fund’s NAV, and the Private Fund needed to value the positions on at least a monthly basis to determine its profit and loss report. As a result, Infinity Q’s valuation process would play a critical role in valuing these positions prior to their termination. 67. The Infinity Q valuation policy was contained in its compliance manual and in the 15 FILED: NEW YORK COUNTY CLERK 02/07/2023 06:40 PM INDEX NO. 651295/2021 NYSCEF DOC. NO. 275 Case 1:22-cv-01346 Document 1 Filed 02/17/22 Page RECEIVED 16 of 65 NYSCEF: 02/07/2023 Private Fund private placement memorandum (“PPM”) that Infinity Q sent to and used to raise funds from investors, from 2017 through May 2020.2 In its valuation policy, Infinity Q stated that it utilized “independent sources, such as brokers or pricing services” to value the Private Fund’s positions. 68. For the OTC derivatives held by the Private Fund, the Infinity Q valuation policy further represented that it “utilizes [the Pricing Service], Broker Quotes, and Counterparty Valuations to provide a fair value for these securities” (until Velissaris surreptitiously revised the Infinity Q valuation policy in May 2020, as alleged below see infra Section IV.B). 69. The Infinity Q valuation policy further provided that “[a]t each month end, valuations are compared to the values provided by counterparties for reasonableness,” and that “[o]nce a price is established for a portfolio security, it shall be used for all Funds that hold the security” (again until Velissaris surreptitiously revised the Infinity Q valuation policy in May 2020, as alleged below, see infra Section IV.B). 70. In its 2019 compliance manual, Infinity Q stated that it utilized “[p]ricing services and broker dealers” in an “attempt to obtain a minimum of two independent prices” when trying to “determine the fair value of the instrument,” and “[t]he final price for each position is typically obtained by calculating the average of the external prices received.” The policy further stated that “[w]hen multiple independent marks are available, Infinity Q does not mark any securities higher than the average of the prices obtained.” To the extent the pricing service or broker quotes “may not provide a reliable indication of fair value, Infinity Q will value such [p]osition based on relevant information,” including internal or external models or other 2 Generally, a PPM is an offering document that introduces the investment and discloses information about the securities offering and the issuer. 16 FILED: NEW YORK COUNTY CLERK 02/07/2023 06:40 PM INDEX NO. 651295/2021 NYSCEF DOC. NO. 275 Case 1:22-cv-01346 Document 1 Filed 02/17/22 Page RECEIVED 17 of 65 NYSCEF: 02/07/2023 appropriate factors. In these circumstances, “[a] written valuation memo/model shall be provided for model-based prices explaining why the price used reflects fair value of the [p]osition,” unless the position had “nominal value.” These provisions were also altered when Velissaris surreptitiously revised the Infinity Q valuation policy in May 2020, as alleged below, see infra Section IV.B. 71. In the Mutual Fund’s 2019 and 2020 annual reports and semi-annual reports, Infinity Q further represented that the Mutual Fund “uses a pricing service to model price the variance swap trades” and that the Pricing Service “uses quotes from brokers to estimate implied volatility levels as an input to these models.” 72. In its required reporting on private funds on Form ADV for 2017 through 2020, Infinity Q represented that 100% of the Private Fund’s assets were valued by a person who was not a “related person” of Infinity Q.3 73. In or around March 2018, Velissaris was asked to review a draft of Infinity Q’s Form ADV, which contained the statement that 100% of the Private Fund’s assets were valued by a person who was not a “related person” of Infinity Q. On March 29, 2018, Velissaris replied by email to that request and wrote: “Looks great. I have no updates.” After Velissaris’s sign-off, the Form ADV was submitted the same day. B. Velissaris Makes Additional Representations About Infinity Q’s Valuation Process 74. Velissaris and others at Infinity Q repeatedly referred to Pricing Service-generated valuations as “independent” prices in communications with, among others, investors, the Board, 3 Form ADV is the uniform form used by investment advisers to register with both the SEC and state securities authorities. 17 FILED: NEW YORK COUNTY CLERK 02/07/2023 06:40 PM INDEX NO. 651295/2021 NYSCEF DOC. NO. 275 Case 1:22-cv-01346 Document 1 Filed 02/17/22 Page RECEIVED 18 of 65 NYSCEF: 02/07/2023 and the Auditor. 75. For example, in response to an August 2016 Board inquiry about Infinity Q’s use of the Pricing Service to price OTC derivatives, Velissaris explained that Infinity Q “provide[s] the term sheet, and [the Pricing Service] created the pricing model. We have not had any input into [the Pricing Service’s] models, and they independently provide the values. [The Pricing Service] also provided the code for the model at the onset for us to have a full understanding of the methodology.” 76. In other correspondence with the Board in October 2016, Velissaris claimed that the Mutual Fund’s “positions were valued independently by [the Pricing Service] team,” and “[w]e were not involved in the valuation process.” 77. In April 2018, Velissaris edited a draft response for the CCO to send to representatives of the Administrator, who had inquired about Infinity Q’s valuation process. The draft response, after Velissaris’s edits, represented: “Infinity Q does not price any securities ourselves. Prices are either provided by [the Pricing Service] directly to [the Administrator] for non-vanilla OTC instruments or we forward [Pricing Service] values to [the Administrator] for positions not requiring [Pricing Service] valuation.” This response was then sent by the CCO to representatives of the Administrator with Velissaris copied. Representatives of the Administrator replied to the CCO, with Velissaris copied, that the approach was acceptable to them as long as Infinity Q was “complete and thorough in your summary.” The Administrator further stated that “anything that is not downloaded directly from [the Pricing Service] is adviser priced even if you use models on [the Pricing Service] to complete the valuations. This is due to Infinity Q still having the ability to change inputs or calibrate any of the models.” 78. In April 2018, Velissaris informed the Auditor that Infinity Q’s variance and 18 FILED: NEW YORK COUNTY CLERK 02/07/2023 06:40 PM INDEX NO. 651295/2021 NYSCEF DOC. NO. 275 Case 1:22-cv-01346 Document 1 Filed 02/17/22 Page RECEIVED 19 of 65 NYSCEF: 02/07/2023 correlation swaps “are modeled independently by [the Pricing Service] and [the Pricing Service] independently obtains broker implied volatility values (with no input from our team).” In October 2018, Velissaris informed the Auditor that “[t]he [Pricing Service] team uses a stochastic model to price these securities.” 79. Velissaris and Infinity Q also repeatedly told investors and provided them with documents that indicated that Infinity Q had no role in the Pricing Service valuation process, that the Pricing Service was independent from Infinity Q, and that the Administrator obtained values directly from the Pricing Service with no Infinity Q involvement. For example, a 2019 due diligence report prepared by a third-party diligence consultant on behalf of a potential investor in the Private Fund, reported that Infinity Q represented that, “[i]n practice,” the Administrator, not Infinity Q, “price[d] the book independently using [the Pricing Service].” According to Infinity Q, “[w]hen trades are completed, [Infinity Q] sends [the Pricing Service] the details and [the Pricing Service] will model the securities independent of [Infinity Q],” and Infinity Q “do[es] not override [the Pricing Service].” The potential investor subsequently invested in the Private Fund. 80. Similarly, in May 2020, Velissaris told an investor that “[t]he valuation and reporting for the mutual fund is conducted by [the Administrator].” III. Velissaris’s Mismarking Scheme 81. The statements made by Velissaris and Infinity Q during the Relevant Period about Infinity Q’s valuation process, including about the use of the Pricing Service, were false or misleading. Velissaris knew or recklessly disregarded that he was, in fact, manipulating the valuations of the Infinity Q Funds’ positions in the Pricing Service and was able to effectively set the terms and edit computer code to produce valuations of positions at whatever level he desired. 82. There were three primary steps for Velissaris to price an OTC derivative position 19 FILED: NEW YORK COUNTY CLERK 02/07/2023 06:40 PM INDEX NO. 651295/2021 NYSCEF DOC. NO. 275 Case 1:22-cv-01346 Document 1 Filed 02/17/22 Page RECEIVED 20 of 65 NYSCEF: 02/07/2023 held by the Infinity Q Funds through the Pricing Service. 83. First, Velissaris was required to select, from among numerous models available from the Pricing Service, a model appropriate for the position. For example, the Pricing Service offered a basic valuation model for a “vanilla” variance swap and a different model for a “corridor” variance swap, which model would take into account the corridors. See infra Section III.A.1. 84. Second, upon selecting the appropriate model, Velissaris was required to enter the terms of the transaction, as reflected in the term sheet or confirmation between Infinity Q and the broker-dealer counterparty, into a user interface (“User Interface”). The User Interface for a particular model included fields for the entry of the terms of the transaction. Once the terms were entered into the fields, they then appeared in the Pricing Service’s User Interface. 85. After the terms of the transaction were entered into the available fields of the User Interface, those terms were automatically mapped, or copied, onto the model’s underlying computer code that ultimately calculated a valuation for the position (the “Underlying Valuation Code”). 86. Finally, to the extent applicable for the position, Velissaris could select a volatility surface or snapshot from a drop down menu of options available from the Pricing Service. Volatility, which was derived from the volatility surface, was also a key input for many