SEC Charges President/CCO of Prophecy Asset Management Advisory Firm with Multi-Year Fraud”

In a startling revelation, the Securities and Exchange Commission (SEC) has charged John Hughes, the president and chief compliance officer of Prophecy Asset Management LP, with orchestrating a multi-year fraud.

This case serves as a stark reminder of the potential pitfalls in the asset management industry and the importance of investor vigilance.

The Deceptive Practices of Prophecy Asset Management

Prophecy Asset Management, an advisory firm overseeing over $500 million in assets, advised multiple hedge funds.

According to the SEC, Hughes and his associates engaged in deceptive practices that misled investors, auditors, and administrators about the funds’ trading practices, risks, and performance. This deceit was unethical and resulted in substantial financial losses for investors.

Concealing Losses and Misleading Investors

The crux of the fraud involved concealing losses amounting to hundreds of millions of dollars. Hughes led investors to believe their investments were safeguarded through diversification among numerous sub-advisers trading in liquid securities. Contrary to these assurances, most capital was funneled to a single sub-adviser who incurred massive losses. These losses were further exacerbated by investments in highly illiquid assets.

Fabrication and Sham Transactions

To cover up the funds’ dire financial state, Hughes resorted to fabricating documents and engaging in sham transactions. This level of deceit points to a sophisticated and calculated effort to mislead and defraud investors.

The Inevitable Collapse

By 2020, the losses in funds managed by Prophecy Asset Management had exceeded $350 million, leading to the indefinite suspension of redemptions by investors. This collapse was the culmination of years of fraudulent activities and mismanagement.

SEC’s Response and Legal Actions

The SEC’s complaint, filed in the U.S. District Court for the District of New Jersey, charges Hughes with violations of the antifraud provisions of federal securities laws.

The Commission seeks a permanent injunction, disgorgement of ill-gotten gains, 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 against Hughes.

Conclusion

The Prophecy Asset Management fraud case is a cautionary tale about the risks inherent in the investment advisory sector. It highlights the need for stringent oversight and the importance of ethical conduct in finance.

As always, the Sonn Law Group is committed to keeping investors informed and advocating for those wronged in the financial marketplace.

Stay tuned to the Sonn Law Group blog for more insights and updates on similar cases.