Overview:
The SEC's Division of Examinations (“DOE”), formerly known as the Office of Compliance Inspections and Examinations ("OCIE"), has continued to increase focus on valuation practices for investment advisor and investment company examinations.
As discussed in recent Risk Alerts posted by DOE, best practices and procedures that can help meet greater SEC regulation and scrutiny include:
- Adoption of written/documented valuation policies and procedures;
- Establishing an internal pricing committee;
- Maintaining an advisory board or committee;
- Continuous investment monitoring; and
- Appointing an independent third-party valuation provider.
The following cases are examples of compliance failures of accounting principles, in which the Securities and Exchange Commission pursued action against Fund Managers for “mispricing” or “mismarking” securities:
SEC Charges Infinity Q Founder with Orchestrating Massive Valuation Fraud (February 2022)(1)
On February 17, 2022, the Securities and Exchange Commission charged James Velissaris, former Chief Investment Officer and founder of Infinity Q Capital Management, with overvaluing assets 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. Velissaris executed the overvaluation scheme by altering inputs and manipulating the code of a third-party pricing service used to value the funds’ assets. The allegations also state that through his fraudulent conduct, Velissaris collected more than $26 million in profit distributions due to such overvaluation.
In an attempt to cover up his scheme, Velissaris deceived the staff by creating backdated minutes of valuation meetings that never occurred and altering documents that described Infinity Q’s valuation policies. Forged term sheets were also sent to the auditor of the mutual fund and the private fund.
During a time of volatile markets in the wake of the COVID-19 pandemic, 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. At times, the funds’ actual values were half of what investors were told.
In February 2021, Velissaris was removed from his role with Infinity Q after the SEC confronted the firm with information suggesting that Velissaris had been adjusting the third-party pricing model. Several days later, at Infinity Q’s request and to protect shareholders, the Commission issued an order (Investment Company Act Rel. No. 34198 (Feb. 22, 2021)) to suspend redemptions of the mutual fund.
The SEC’s complaint, filed in the U.S. District Court for the Southern District of New York, charges Velissaris with violating antifraud and other provisions of the federal securities laws. The complaint seeks permanent injunctive relief, return of allegedly ill-gotten gains, civil penalties and to bar Velissaris from serving as a public company officer and director.
To continue reading, please view all cases here:
How Houlihan Capital Can Help
Houlihan Capital can review a fund's valuation policies and provide clients with independent valuations of geographically diverse assets ranging from single investments to multi-class portfolios. The firm has a history of working closely with regulators, auditors, third-party administrators, investors, and some of the world's largest private investment funds.
For more information on our valuation services, please contact info@houlihancapital.com.
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(1) https://www.sec.gov/litigation/complaints/2022/comp-pr2022-29.pdf
