Chicago-based Stoltmann Law Offices represents investors who’ve suffered losses as a result of conflicted, fraudulent, and negligent financial advice. Sometimes the investments advisors recommend are themselves engaged in a fraud or some other scheme. These sorts of games can happen in any investment fund, but are far more common in private equity or other private investment funds.
The Securities and Exchange Commission (SEC) has charged James Velissaris, the former Chief Investment Officer and founder of Infinity Q Capital Management, with overvaluing assets of funds his company sold by more than $1 billion while pocketing tens of millions of dollars in fees. The SEC’s complaint alleges that, “from at least 2017 through February 2021, Velissaris engaged in a fraudulent scheme to overvalue assets held by the Infinity Q Diversified Alpha mutual fund and the Infinity Q Volatility Alpha private fund.” According to the SEC complaint, “Velissaris executed the overvaluation scheme by altering inputs and manipulating the code of a third-party pricing service used to value the funds’ assets. Velissaris allegedly collected more than $26 million in profit distributions through his fraudulent conduct and without disclosing his activities to investors.
“While Velissaris marketed the mutual fund as a way for retail investors to access investment strategies typically reserved for high-net-worth clients,” the SEC alleges, “what he actually offered them were fraudulent documents, altered performance results, and manipulated valuations.” The SEC also alleges that, “by masking actual performance, Velissaris sought to thwart redemptions by investors who likely would have requested a return of their money had they known the funds’ actual performance, particularly in the volatile markets in the wake of the COVID-19 pandemic. The complaint alleges that at times during the pandemic, the funds’ actual values were half of what investors were told.”
This fraudulent scams like pumping up the value of a fund’s underlying assets are not new. It serves a dual purpose: one-inflate the values because that means the fund manager gets paid more money; and two-create the myth of solid fund performance which attracts new investor money, which keeps the scam alive. The question is, how can an investor, or more importantly, a financial advisor or investment advisor recommending the fund to a client, know if the Fund they recommend is committing fraud like this? First, never recommend a fund that does not offer audited financial statements prior to investing. Its important too that the accounting firm retained to perform the audits is reputable (not necessarily “big three”), but at least has experience auditing financial statements for pooled, private, investment funds. Also, check for conflicts between the accounting firm and the fund manager. Sometimes the relationship between the accounting firm doing the audits and the fund manager is too close and not at arms-length. Second, ask the fund manager to see behind the curtain. Ask questions about the investment style and specifically how assets are evaluated and what metrics are used. If the Manager claims the information is private or proprietary, offer to sign a Non-Disclosure Agreement (extremely common) and if that doesn’t work, don’t recommend the fund for investment to your clients. These are basic, fundamental due diligence steps ANY financial or investment advisor must take prior to offering any private fund for investment to their clients.
If you invested with a broker-advisor and lost money as a result, you may have a claim to pursue through FINRA Arbitration. Please contact Stoltmann Law Offices, P.C. at 312-332-4200 for a free, no obligation consultation with a securities attorney. Stoltmann Law Offices is a contingency fee law firm which means we do not get paid until you do!