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Advisory firm president charged for defrauding investors

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Investor Protections
Friday, November 17, 2023

The Securities and Exchange Commission (SEC) charged New Jersey resident John Hughes, president and chief compliance officer (CCO) of Prophecy Asset Management LP, for defrauding investors out of hundreds of millions of dollars between 2014 and 2020.

Prophecy Asset Management (PAM) advised hedge funds and reported more than $500 million in assets. The SEC’s complaint alleges Hughes and his associates misled investors, auditors, and administrators about the funds’ trading practices, risk, and performance, all while collecting more than $15 million in fees.

“We allege that John Hughes committed a brazen and sophisticated fraud that deceived investors to keep Prophecy Asset Management and the funds afloat, despite massive undisclosed trading losses. But the collapse was inevitable,” SEC Philadelphia Regional Office’s Regional Director Nicholas Grippo said in a release. “As president and CCO, Hughes served in an important gatekeeping role and owed fiduciary duties to his clients. As alleged, he did not live up to those duties. The SEC will continue to use all the tools at our disposal to root out and expose fraud by investment advisers.”

According to the SEC complaint, filed in U.S. District Court for the District of New Jersey, Hughes violated the antifraud provisions of the federal securities laws through a multi-year investment adviser fraud.

“During the period 2014 through March 2020, Hughes deceived the investment funds’ investors, prospective investors, auditors and administrator about nearly every aspect of the investment funds, including their structure and operation, risk-management practices, investments, and performance,” the complaint states.

The complaint alleged Hughes and PAM told investors “the investment funds were diversified, liquid, actively risk managed, generated positive returns every month since their inception, and that the primary investment fund was secured by cash collateral. … Instead, they concentrated a huge percentage of the investment funds’ assets with a single subadviser, who sustained massive losses unbeknownst to investors.”

By March 2020, fund losses exceeded $350 million.

Hughes and his co-conspirators fabricated paperwork to hide the losses from investors and “engaged in sham, round-trip transactions designed to give the false appearance that investments had performed profitably. These actions painted an inaccurate picture of the funds’ financial health by hiding losses and other impaired assets, which, in turn, inflated the value of the funds and generated excessive management and incentive fees” that totaled more than $15 million, according to the complaint.

The SEC complaint is seeking a permanent injunction, disgorgement of ill-gotten gains plus interest, civil penalties, and an officer and director bar.

In a parallel action, the U.S. Attorney’s Office for the District of New Jersey announced criminal charges. Hughes pleaded guilty in U.S. District Court in New Jersey to one count to of conspiracy to commit securities fraud.

“John Hughes admitted today that he orchestrated a complex and sophisticated scheme to bilk investors of their hard-earned money,” U.S. Attorney Philip R. Sellinger said in a release. “Securities fraud enforcement is a top priority for this office. Investors need to be able to trust that the people who are handling their money are behaving honorably. The defendant broke that trust to enrich himself. He will now face just punishment for his crimes.”

The conspiracy to commit securities fraud charge carries a maximum penalty of five years in prison and a $250,000 fine. Sentencing for Hughes is scheduled for March 21, 2024.

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