(Article from Registered Funds Regulatory Update, April 2022)
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Investors filed a class action lawsuit against, among others, Trust for Advised Portfolios (the “Trust”), a registered investment company, its investment adviser, Infinity Q Capital Management (“Infinity Q”), and its board of trustees (collectively, the “Defendants”) for securities fraud, alleging pricing manipulation and material misrepresentation of the net asset values of a series fund of the Trust and its parallel hedge fund both managed by Infinity Q. The suit was filed one day after the U.S. Department of Justice indicted Infinity Q’s founder and chief investment officer, James Velissaris, for allegedly inflating Infinity Q Fund assets by over $1.0 billion and falsifying records. Velissaris was also charged with wire fraud and lying to auditors. Civil charges were also filed against Velissaris by the SEC and CFTC. Investors claim massive losses caused by the pricing manipulation and misrepresentations and now seek to recoup those losses.
The funds were marketed to shareholders seeking “moderate growth” and “asymmetric returns” through the use of a swap strategy intended to preserve capital. The SEC alleges that Infinity Q was able to attract billions of dollars from investors by touting the ability of the funds to provide investors with exposure to alternative strategies used by hedge fund and private equity investors. Importantly, Infinity Q used third-party pricing service models to price these alternative investments for the purpose of calculating the funds’ daily net asset values. However, according to the complaint, Infinity Q was manipulating these models to inflate the net asset value of the funds from 2017 to 2021. During this same period, the funds’ marketing materials described robust valuation procedures, methodologies and controls utilized by the funds to ensure accurate pricing of the funds’ holdings. Despite the funds’ disclosure, Infinity Q personnel allegedly intentionally mismarked the funds’ assets to make their net asset values appear artificially higher. As examples, the Complaint alleges that one reported valuation was “mathematically impossible” and another “defied logic.” Therefore, the nonsensical nature of the valuations indicate that each of the Defendants, including the board of trustees of the mutual fund who had responsibility for determining the fair value of the fund’s securities in good faith, knew, or should have known, that the funds’ net asset values were fraudulent.
In February 2021, Infinity Q unexpectedly halted redemptions to investors stating that it could not continue to value holdings after two whistleblowers filed complaints with the SEC, which prompted the SEC to commence an investigation. Thereafter, the SEC issued an exemptive order to the mutual fund and investors of the hedge fund were notified that the funds would continue to deny redemptions and liquidate their assets, leading to “one of the most egregious investment fund collapses in history wherein the funds lost over 40% of their respective values.” Specifically, each Fund’s net asset value had been overstated by $500 million from its last reported net asset value. Investors claim that they remain unable to withdraw their remaining money from the funds, which is being held back to cover fund expenses, and that fund assets are being depleted while they wait. This lawsuit now seeks to hold the Defendants liable for such losses.
Complaint, Schiavi v. Infinity Q Capital Mgmt., Case 1:22-cv-00896 (E.D.N.Y. Feb. 17, 2022).