Firm Founder Sentenced to 15 Years in Prison For Fraud

The founder and former chief investment officer of a New York-based investment advisor that ran a mutual fund and hedge fund claiming to have about $3 billion in assets under management combined was sentenced on Thursday to 15 years in prison for his role in a scheme to defraud investors, the Justice Department said Monday.

James Velissaris, 38, of Atlanta started Infinity Q Capital Management, a Securities and Exchange Commission-registered firm that employed a small staff, including a chief compliance and chief risk officer, in 2014, according to the Justice Department.

The sentence was imposed on Velissaris by Judge Denise L. Cote in U.S. District Court for the Southern District of New York.

In addition to his prison term, Velissaris was sentenced to three years of supervised release and agreed to pay about $22 million in forfeiture. The court reserved decision on the amount of restitution.

A ‘Complex’ Scheme

“Velissaris wove a complex scheme to defraud investors in Infinity Q’s investment funds, and he continuously lied to investors, auditors, and even the SEC in order to hide his crimes,” according to Damian Williams, U.S. Attorney for the Southern District of New York.

His “massive scheme was calculated and deceptive, and he now justly faces 15 years in federal prison,” Williams said in a statement on Monday. “We hope this lengthy sentence resonates in the financial sector and deters anyone who may be tempted to lie to investors.”

A major component of both the mutual fund and hedge fund’s holdings was over-the-counter derivative positions involving customized contracts that allowed the counterparties to take positions on the volatility, or price movement, of underlying assets or indexes, according to the Justice Department.

Velissaris, through Infinity Q, represented to its investors that it valued these OTC derivative positions based on fair value, and that in order to do so, it utilized the services of an independent third-party provider.

In particular, Infinity Q represented to investors and other stakeholders that it used Bloomberg Valuations Service to independently calculate the fair value of these positions, in accordance with the terms of the underlying derivative contracts, according to the Justice Department.

In fact, however, Velissaris defrauded Infinity Q’s investors by taking an active role in the valuation of Infinity Q’s positions and by modeling the positions in ways that weren’t based on the actual terms of the underlying contracts and were inconsistent with fair value, according to the Justice Department.

Lied to Regulators, Stakeholders

To hide the scheme and prevent its detection, Velissaris lied to several outside stakeholders and regulators, the Justice Department said.

Starting in May 2020, the SEC opened an inquiry and later an investigation into Infinity Q’s valuation practices. In connection with that investigation, Velissaris provided false and misleading information to the regulator, the Justice Department said.

For instance, when the SEC asked for original documents that had been provided to investors, Velissaris altered the documents before providing them, including certain alterations that would help hide his mismarking scheme.

To conceal the falsity of Infinity Q’s disclosures, Velissaris, with another employee of the firm, removed that line from investor documents that had been provided to the SEC.

In June 2020, the SEC requested Infinity Q provide additional materials, including documents regarding Infinity Q’s valuation committee and all its meeting minutes.

But Velissaris did not keep notes of any such meetings. So, a few days before responding to the SEC, he made up notes purporting to be from valuation committee meetings in 2019 and 2020 and submitted them to the SEC, the Justice Department said.

The SEC filed a complaint against Velissaris in the same court as the Justice Department’s on Feb. 17, 2022, the same date the latter filed an indictment against him.