by T. GormanPosted on Posted in SECActions

One of the issues frequently seen in matters where insiders manipulate the numbers to increase revenue or decrease costs, is the impossibility of stopping once the process begins until they are caught. Frequently, the insiders involved convince themselves that once will be enough or maybe twice, but usually not. The Commission’s most recent case in this area is a good example, SEC v. Infinity Q Capital Management, LLC, Civil Action No. 1:23-cv-05081 (S.D.N.Y. Filed June 16, 2023).

Named as defendant is a registered investment adviser based in New York City. The owners are Infinity Q Management Equity, LLC and Wildcat Partner Holdings, LP.

Over a four-year period, beginning in February 2017, Infinity Q told investors and others that the Infinity Q Funds were valued by an independent third party pricing service. The statement is not true. In fact, the firm was manipulating the valuation models available from the pricing service to conceal poor performance by the funds managed.

Infinity used four approaches: 1) the computer code for the models was altered; 2) inputs were incorrect; 3) certain valuation models were selected that could not properly value the assets; and 4) it cherry picked one of the key valuation inputs. The result was materially inflated values. The manipulative actions were so pervasive that at times the same security in different funds had different values.

COVID presented a challenge. The funds were not in a position to sustain increased market turmoil. An effort to secure a $100 million cash infusion from affiliates failed. The only possible choice was to step-up the manipulation. This effort resulted in asset increases by hundreds of millions of dollars. In one mutual fund, for example, the increases were about 42%. In a private fund the increase was about 137%. It also resulted in reported values for the funds being out of sync with those at similar funds.

Defendant did try to conceal the scheme form investors and the independent auditors. The auditors, for example, were convinced that the valuations were reasonable. Yet the overvaluation was by about $1 billion. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 204(a), 206(1), 206(2), 206(4), 207 and aiding and abetting violations of Rule 22c-1 under the Investment Company Act. The case is in litigation.

James R. Velissaris, the founder and CIO of Infinity Q and majority owner of Infinity Q Management Equity LLC pleaded guilty to one count of securities fraud. He has been sentenced to 180 months in prison. See Lit. Rel. No. 25750 June 16, 2023.

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by T. GormanPosted on Posted in SECActions

The sale of unregistered securities has long been a staple of the Commission’s enforcement program. Over the years dozens of cases have been brought. Likewise, millions of dollars have been paid by investors to purchase the unregistered securities. In many instances the investors were solicited with false statements. Those statements range from claims about the use that will be made of the funds to the nature of the entity in which an interest is being acquired to if commissions were being charged. In some cases, there is no entity to invest in – the shares being sold may be to an entity that is non-existent, a sham or a shell.

The Commission’s latest case in this area involves an entity with an attractive name which at one time conducted a business. That business is gone, however. Nevertheless, investors were induced to purchase shares with the hope of making a profit. SEC v. Native American Energy Group, Inc., Civil Action No. 1:23-cv-04455 (E.D.N.Y. Filed June 16, 2023).

Named as defendants are: the company, a firm reputed to have had operations in the Fort Peck Indian Reservation in Montana. Later the company sold five wells it had operated to Shell Trading (US) Company but now has no business; Joseph D’Arrigo, the long-time president of the firm who had been sanctioned by the Connecticut Banking Commission; and David Hudzik, at one-time a consultant to the company and also a former registered representative.

Over a six year period, beginning in October 2014, Defendants solicited investors to invest in what was called a subscription agreement, described as an “investment in the company” by Defendant D’Arrigo. Defendant Hudzik aided with the sale of the subscriptions. He told investors that commissions were not charged on the interests acquired. About $3.43 million was raised from the solicitations.

In fact, the representations were false. The funds were not an investment in Native American. Rather, much of the money went to Mr. D’Arrigo who diverted it to his personal use. He also misappropriated about $958, 500. The claims about no commissions were also false. In fact, Mr. Hudzik was paid a commission of 20% and 30%.

In the end, the sale of the interests was also prohibited. None were registered. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a). The case is in litigation. See Lit. Rel. No. 23-civ-4455 (June 16, 2023).