The Commodity Futures Trading Commission (CFTC) levied fraud charges against a hedge fund manager this week.
The CFTC filed a civil enforcement action in the U.S. District Court for the Southern District of New York against James R. Velissaris of Atlanta, Ga., with fraud. The charges are in connection with a scheme to overvalue the assets managed by his multi-billion-dollar hedge fund, Infinity Q Capital Management.
“This action demonstrates that the Commission will continue to focus on customer protection across the multifarious markets and products under its jurisdiction,” Acting Director of Enforcement Vincent McGonagle said. “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.”
From at least Jan. 1, 2018, through at least Feb. 28, 2021, through his company, Infinity Q, Velissaris engaged in a fraudulent valuation scheme to show false gains on hundreds of swaps held by two commodities pools, according to the complaint.
The CFTC alleges that Velissaris engaged in this fraud before the COVID-19 global pandemic, but the scope and scale of the fraud increased as he tried simultaneously to mitigate against, and also take advantage of, the unprecedented market volatility caused by the pandemic. The CFTC alleges that Velissaris executed his scheme by intentionally corrupting the independent, third-party pricing service models Infinity Q used to value swaps held by the two commodity pools.
The complaint also alleges that Velissaris surreptitiously inputted false information into the models; changing the models’ standard underlying computation codes; and using improper pricing templates to guarantee the pricing service would return whatever artificial values he wanted. As a result of these fraudulent valuations, Velissaris caused Infinity Q to show hundreds of millions of dollars in false, exaggerated gains, the complaint alleges. This created a false record of success that Infinity Q then used to charge inflated fees.
Further, CFTC alleges that Velissaris took various steps to conceal his fraud, including providing falsified swap term sheets to Infinity Q’s auditors; surreptitiously making retroactive changes to Infinity Q’s written valuation policy; and creating phony minutes for meetings of Infinity Q’s valuation committee that never happened.
CFTC officials said the fraudulent scheme resulted in the overvaluation of the funds managed by Infinity Q in certain months by more than $1 billion.
The CFTC is seeking restitution to defrauded pool participants, disgorgement of ill-gotten gains, civil monetary penalties, permanent registration and trading bans, and permanent injunctions against further violations of the Commodity Exchange Act (CEA) and CFTC regulations, as charged. Division of Enforcement staff members responsible for this case are Jonah E. McCarthy, Traci Rodriguez, John Buffington, Catherine Brescia, Hillary Van Tassel, and Paul G. Hayeck.
The U.S. Attorney’s Office for the Southern District of New York announced the indictment of Velissaris while the Securities and Exchange Commission (SEC) filed a civil complaint against Velissaris.