SEC Charges President and CCO of Prophecy Asset Management with Multi-Year Fraud

The Securities and Exchange Commission (SEC) has announced charges against John Hughes, the President and Chief Compliance Officer (CCO) of Prophecy Asset Management LP, a registered investment adviser. The charges come in connection with a multi-year fraud scheme that concealed losses of hundreds of millions of dollars from investors.

Prophecy Asset Management advised multiple hedge funds, boasting more than $500 million in assets under management. The SEC's complaint alleges that Hughes and his associates at the firm misled the funds' investors, auditors, and administrators about the trading practices, risk, and performance of the funds. Throughout this time, they collected more than $15 million in fees.

According to the SEC's complaint, Hughes led investors to believe that their investments were safeguarded from loss. He claimed that the funds' capital was diversified among numerous sub-advisers who traded in liquid securities and posted cash collateral to offset any potential trading losses. In reality, most of the funds' capital was funneled to a single sub-adviser, who incurred massive trading losses exceeding the cash collateral he contributed. Additionally, Hughes had the funds invest in highly illiquid assets, resulting in significant losses. Hughes went to great lengths to hide these losses, fabricating documents and engaging in sham transactions to conceal the funds' actual financial status.

The complaint also alleges that Hughes misled investors about the diversification and trading strategies of two other funds. By 2020, following losses exceeding $350 million in funds managed by Prophecy Asset Management, Hughes and the firm indefinitely suspended redemptions by investors.

Nicholas P. Grippo, Regional Director of the SEC's Philadelphia Regional Office, stated, "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. 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."

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 SEC is seeking a permanent injunction, disgorgement of ill-gotten gains plus interest, civil penalties, and an officer and director bar. Additionally, the U.S. Attorney's Office for the District of New Jersey has announced criminal charges against Hughes in a parallel action.