(Article from Registered Funds Regulatory Update, July 2023
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In July 2021, Infinity Q Capital Management LLC and its officers filed a complaint in the Delaware Superior Court against three of its insurance providers for breach of contract for failing to advance defense costs incurred by Infinity Q. In August 2022, the Court granted summary judgment to the insurance providers, stating that Infinity Q had executed a warranty statement without disclosing an ongoing SEC inquiry. The Infinity Q parties appealed to the Delaware Supreme Court.
According to the Court’s recitation of facts, from 2014 through August 2020, Infinity Q maintained $5 million in professional liability insurance through a primary insurance policy. In August 2020, Infinity Q added three separate excess liability policies underwritten for claims made during the period from August 2020 through August 2021. Each such insurance provider issued policies with a limit of liability of $5 million.
Prior to the excess policies being binded, Infinity Q executed a required warranty statement attesting that it did not have any knowledge of any facts or circumstances that would give rise to a future claim and that a violation of the knowledge exclusion would void coverage. However, in May 2020, the SEC had notified Infinity Q’s officers of an inquiry regarding potential federal securities law violations. Furthermore, it was revealed that James Velissaris, Founder and former Chief Investment Officer of Infinity Q, had pressed to increase insurance after learning about the SEC investigation. After Infinity Q began facing shareholder complaints and suspended redemptions in February 2021, Infinity Q subsequently claimed on the primary policy, which was paid in full in May 2021, and attempted to claim on the three additional policies. However, those insurance providers refused coverage, citing the failure to disclose the SEC investigation from the warranty statements and a subsequent shareholder complaint as basis for the belief that Velissaris had prior knowledge of the circumstances that may have caused a claim. The Infinity Q officers contended that the insurance providers could not prove the warranty statements prohibited coverage and that they should still be ruled severable with defense costs paid to the innocent insureds, including Infinity Q’s board members who joined the case after the dispute began. The Court held that the prior knowledge exclusions in the warranty statements barred coverage for the claims in dispute and granted summary judgment to the insurance providers.
On a related note, Infinity Q recently settled with the SEC for mispricing the NAV of Infinity Q Diversified Alpha Fund and its parallel hedge fund, the Infinity Q Volatility Alpha Fund, L.P. The Complaint stated that, from at least February 2017 through February 2021, the funds’ reported NAVs were materially and falsely inflated due to a fraudulent mismarking scheme conducted by Infinity Q through Velissaris. Infinity Q agreed to settle the charges and consent to the appointment of a monitor to oversee the return of the remaining funds to harmed private fund investors. The settlement, which permanently enjoined Infinity Q from violating the federal securities laws charged in the Complaint, and the appointed monitor, are subject to Court approval. The SEC previously charged the mutual fund with mispricing its NAV, and the Court appointed a special master to oversee the distribution of the mutual fund’s remaining funds to its harmed investors. Velissaris was sentenced to 15 years in prison for his participation in the fraudulent scheme. Separate settlements were reached with the SEC and other investors in September and November 2022. In November 2022, Velissaris pled guilty to securities fraud charges brought by the Southern District of New York but more recently attempted to retract his plea.
Infinity Q Capital Management, LLC, et al. v. Travelers Casualty and Surety Company, et al., C.A. No. N21C-07-158 EMD CCLD (Aug. 15, 2022), available at: https://www.dandodiary.com/wp-content/uploads/sites/893/2022/08/Infinity-Q-coverage-opinion-Del-Superior-Court-8.15.2022.pdf.
Complaint, SEC v. Infinity Q Capital Management, LLC et al., Case 1:23-cv-05081 (S.D.N.Y. June 16, 2023), available at: https://www.sec.gov/litigation/complaints/2023/comp25750.pdf.