Asset Management Advisory Firm President Charged by SEC in Massive Fraud

John Hughes bilked dozens of victims of nearly $300 million in a ‘brazen and sophisticated fraud’ and has already pleaded guilty to criminal charges.

The Securities and Exchange Commission has charged John Hughes, co-founder, president and chief compliance officer of Prophecy Asset Management LP, with orchestrating a “brazen and sophisticated” fraud over nearly seven years that concealed hundreds of millions of dollars in losses from investors.

The victims included domestic and foreign investors such as pension plans, family trusts, high-net-worth individuals and other institutional investors.

In a parallel action, the U.S. Attorney’s Office for the District of New Jersey charged Hughes with one count of conspiracy to commit securities fraud, to which Hughes has already pleaded guilty.

The SEC’s complaint specifies that Hughes and his associates at Prophecy Asset Management, which advised multiple hedge funds, collected more than $15 million in ill-gotten fees while misleading the funds’ investors, auditors and administrator about their trading practices, risk and performance.

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From 2014 through March 2020, Hughes and the firm raised more than $500 million for the investment funds, all the while misleading investors about the safety of the investments, according to the complaint. According to the SEC, Hughes conned investors into believing their investments were protected from losses by claiming they were diversified among dozens of sub-advisers who traded in liquid securities and posted cash collateral to offset any trading losses they incurred. However, in reality, Hughes and the firm “did not provide investors with stable, diversified, risk-managed, well-performing funds” and instead concentrated a “huge percentage” of the investment funds’ assets with a lone sub-adviser who “sustained massive losses unbeknownst to investors.”

According to the complaint, Hughes also caused the funds to invest in highly illiquid investments, which resulted in significant losses. The regulator also accused Hughes of trying to hide the losses by fabricating documents and engaging in a series of “sham” transactions “designed to give the false appearance that investments had performed profitably.”

After racking up losses of more than $350 million in funds that Prophecy Asset Management managed, Hughes and the firm suspended redemptions by investors indefinitely in 2020, according to the complaint.

“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,” Nicholas Grippo, regional director of the SEC’s Philadelphia Regional Office, said in a statement. “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’s complaint, also filed in U.S. District Court for the District of New Jersey, charges Hughes with violations of the antifraud provisions of federal securities laws and seeks a permanent injunction, disgorgement of ill-gotten gains plus interest, civil penalties and an officer and director bar. Hughes is scheduled to be sentenced on the criminal charges on March 21, 2024. Conspiracy to commit securities fraud carries a maximum penalty of five years in prison and a $250,000 fine.