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SEC charges hedge fund advisor with multi-year fraud

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The Securities and Exchange Commission has charged John Hughes, President and Chief Compliance Officer of registered investment adviser Prophecy Asset Management, for his involvement in a multi-year fraud that concealed losses of hundreds of millions of dollars from investors.

Prophecy Asset Management advised multiple hedge funds and reported more than $500m in assets under management. The SEC’s complaint alleges that Hughes and his associates at Prophecy Asset Management misled the funds’ investors, auditors, and administrator about the funds’ trading practices, risk, and performance – all while collecting more than $15 million in fees.

According to the SEC’s complaint, Hughes led investors to believe that their investments were protected from loss, telling them the funds’ capital was shared among dozens of sub-advisers who traded in liquid securities and posted cash collateral to offset any trading losses they incurred. In reality, most of the funds’ capital went to one sub-adviser, who incurred massive trading losses that far exceeded the cash collateral he had contributed.

In addition, Hughes caused the funds to invest in highly illiquid investments, which also resulted in substantial losses to the funds. Hughes concealed these losses by fabricating documents and engaging in a series of sham transactions to cover-up the true financial condition of the funds. The complaint also alleges that Hughes deceived investors about the diversification and trading strategies in two other funds. By 2020, after losses in funds that Prophecy Asset Management managed amounted to more than $350 million, Hughes and Prophecy Asset Management indefinitely suspended redemptions by investors.

The SEC’s complaint, filed in U.S. District Court for the District of New Jersey, charges Hughes with violations of the antifraud provisions of the federal securities laws and seeks a permanent injunction, disgorgement of ill-gotten gains plus interest, civil penalties, and an officer and director bar.

In a parallel action, the US Attorney’s Office for the District of New Jersey has announced criminal charges against Hughes.

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