(Article from Registered Funds Regulatory Update, April 2023)
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Plaintiff, a shareholder of Infinity Q Diversified Alpha Fund, a series of Trust for Advised Portfolios, sued the Fund’s Board of Trustees, certain Fund officers, and the Fund’s service provider, U.S. Bancorp Fund Services, LLC, in Delaware Chancery Court in February alleging breaches of fiduciary duty. The suit follows settlements in September and November of 2022 reached with the SEC and other investors in connection with a fraudulent valuation scheme involving the Fund and its parallel hedge fund, the Infinity Q Volatility Alpha Fund, L.P., both of which were managed by Infinity Q Capital Management LLC (“Infinity Q”). According to those settlements, from February 2017 through February 2021, James Velissaris, Founder and former Chief Investment Officer of Infinity Q, manipulated securities valuation models from third-party pricing services and altered inputs to hide the Fund’s poor performance. In November, Velissaris pled guilty to securities fraud charges brought by the Southern District of New York.
The new suit alleges that the Board and U.S. Bancorp, both of which the Complaint describes as not having the “expertise or willingness” to monitor the complex derivative instruments used by the Fund, abdicated their oversight responsibilities over the valuation process and instead “rubber-stamped” Fund valuations unilaterally determined by Infinity Q and ignored various discrepancies, including “mismatching prices with counterparties, mathematically impossible prices, and inexplicable write-downs of previously valuable securities.”
According to the Complaint, U.S. Bancorp was contractually responsible for a variety of the Fund’s operations, including valuation, and “expressly agreed in its contracts with the Fund to be liable for its own negligence in performing these duties.” U.S. Bancorp offered “turnkey” mutual fund services covering a variety of governance, administrative, transfer, custody, and other services. U.S. Bancorp also served as the fund accountant.
The suit also claims that, instead of acting to recover the Fund’s losses for shareholders following the actions filed by the SEC and others in 2022, the Board set aside $500 million of Fund assets to pay for its own defense and the defense of the Fund’s service providers that did not have a legitimate claim to indemnification by the Fund. Plaintiff further alleges that the special litigation committee formed by the Board on behalf of the Fund, and led by then-newly nominated trustee Andrew Calamari, has not pursued potential claims and has instead sought to shield the Fund’s trustees from liability. According to the Complaint, Calamari, who was also appointed special master to oversee the distribution of Fund assets to shareholders, has refused to bring any actions on behalf of the Fund and allow the claims asserted by Plaintiff to proceed in the Chancery Court or be summarily resolved in the November SEC action.
The Complaint also takes issue with Calamari’s position that the Trustees are entitled to indemnification from the Fund “despite their egregious conduct that caused the Fund’s collapse” and the relevant governing documents provide no basis for indemnifying the Trustees, which do not provide for indemnification for misconduct, including gross negligence.
The suit seeks damages for the Fund in amounts to be proven at trial, disgorgement from U.S. Bancorp of any fees collected for its services, and declaratory judgment that Defendants are not entitled to indemnification.
Complaint, Rowan v. Infinity Q Capital Management, et al., No. 2022-0176-MTZ (Del. Ch. Feb. 26, 2023).