NEW JERSEY – A co-founder of Prophecy Asset Management admitted defrauding clients of US$294 million (S$401 million) they were told would be invested according to a low-risk strategy.
John Hughes pleaded guilty on Thursday to conspiracy to commit securities fraud in federal court in New Jersey.
In addition to co-founding the New York-based fund, he served as chief operating officer and chief compliance officer of Prophecy, which operated from January 2015 to March 2020 and once had US$360 million in assets under management, according to prosecutors.
Hughes said he worked with two co-conspirators – a co-founder of Prophecy and the chief executive of a multi-billion-dollar retail franchise company.
Prosecutors have not identified the co-conspirators, but a person familiar with the matter said they were Prophecy CEO Jeffrey Spotts and Franchise Group CEO Brian Kahn.
In August, Mr Kahn led a US$2.6 billion management buyout of Franchise Group, which owns brands including Vitamin Shoppe, Sylvan Learning and Wag N Wash.
It is unclear if Mr Spotts or Mr Kahn are also facing charges.
Hughes admitted he helped raise hundreds of millions of dollars by falsely marketing the fund as following a low-risk and transparent investment strategy in which investor money was spread among many so-called sub-advisers with successful track records.
These sub-advisers were also supposed to provide cash collateral equivalent to 10 per cent of the Prophecy funds they were accessing.
But, in reality, Hughes said 86 per cent of Prophecy’s funds were allocated to just six trading entities controlled by the franchise company’s CEO, who was largely exempted from the collateral requirements.
Those entities had lost US$294 million by March 2020, but Hughes and his co-conspirators concealed the losses from investors and their auditor through bogus transactions and forged documents, he admitted.
The United States Securities and Exchange Commission (SEC) also sued Hughes on Thursday.
According to the SEC, Prophecy told its investors that their money was split among 33 sub-advisers, even though US$1 billion of the fund’s leveraged capital was controlled by the retail CEO.
To cover his losses, the CEO agreed to pledge nearly US$200 million in shares in the company he led to a limited partnership controlled by Prophecy, the SEC said.
Though it is unclear if the shares were ever transferred, Prophecy reported it as an asset, according to the suit. BLOOMBERG
