James Velissaris securities fraud plea will stand, Second Circuit rules

MANHATTAN (CN) — A Second Circuit Court of Appeals panel on Wednesday upheld the guilty plea of a successful New York hedge fund manager who admitted in 2022 to Securities and Exchange Commission violations that got him a 15-year prison sentence.

James Velissaris, founder of the $3 billion hedge fund Infinity Q Capital Management, pleaded guilty to one count of securities fraud for lying to his investors about his fraudulent use of Bloomberg Valuation Service or BVAL. But he argued to the appeals court last month that he should be allowed to withdraw his guilty plea since he actually made the proper disclosures in fine print to his investors.

“Velissaris should be allowed to withdraw his guilty plea because he is actually innocent," the former hedge fund manager argued in his 59-page appellate brief. “He cannot be guilty of disclosure fraud when he disclosed the very thing that he is accused of concealing.”

The court ruled that Velissaris unsuccessfully argued that he never made material misrepresentations according to the bespeaks-caution doctrine, a securities law that holds forward-looking statements are not misleading so long as they are accompanied by disclosures of adequate risk.

“That safe harbor is inapplicable here because Velissaris was not charged with making misleading forward-looking statements,” the court wrote Wednesday in its nine-page ruling. “Rather, he was charged with and pled guilty to making material misrepresentations about his ongoing administration of the asset valuation process within Infinity Q–that is, an omission of present fact.”

Prosecutors charged Velissaris for a scheme in which he told investors that he was using BVAL to independently price assets without his own interference, when in reality he was secretly altering computer code to inflate reported values and boost his own management fees. But despite Velissaris’ appellate argument that he actually disclosed his interference, the panel found that he still omitted information that would have been relevant to investors.

Calling Velissaris’ arguments “unpersuasive,” on the Wednesday ruling, the panel upheld the ruling from U.S. District Judge Denise Cote, a Bill Clinton appointee, who previously rejected Velissaris’ bid to toss his plea before sentencing him.

Velissaris contended that Cote abused discretion when doing so, as the judge considered evidence beyond his plea allocation in denying his plea withdrawal.

“This argument is also unavailing,” the Second Circuit ruled. “We have long recognized a district court’s ability to consider evidence in the record beyond a defendant’s plea allocution in ruling on a motion to withdraw a plea.”

U.S. Circuit Judges Beth Robinson, a Joe Biden appointee, Barrington Parker, a George W. Bush appointee, and William Nardini, a Donald Trump appointee, authored Wednesday’s ruling. The trio already appeared skeptical of Velissaris’ arguments last month when they heard oral arguments on the matter.

Robinson in particular made it clear that she wasn’t buying the assertion that Velissaris’ disclosures absolved him of the conduct he pleaded guilty to. She pressed defense attorney Aaron Lindstrom, of the Dallas-based Barnes & Thornburg, on the fact that Velissaris’ disclosures never specifically said he was influencing valuations.

“Even if the disclosure said he could do something different, he told them that’s not what he was doing,” Robinson said on Sept. 19. “He said, ‘I’m using this tool.’”

“He admitted that he was not relying specifically on BVAL,” Lindstrom replied. “He did use his judgment … What he told the individual investors was that he was relying solely on BVAL. What the annual report, the private offering manual and the private placement manual show is that he’s allowed to deviate from BVAL.”

At those arguments, Assistant U.S. Attorney Margaret Graham shot down Velissaris’ notion that he was misled by the government into pleading guilty to conduct that wasn’t criminal. She called Velissaris’ valuations, which she said had “nothing to do” with fair value, “mathematically impossible.”

Lindstrom didn’t immediately respond to requests for comment on Wednesday’s order.

Prosecutors initially nabbed Velissaris on charges including securities fraud, investment adviser fraud, wire fraud and obstructing an SEC investigation. But Velissaris ducked the other counts when he pleaded guilty to the single securities fraud charge.

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