US federal prosecutors have dropped securities fraud charges against former Prophecy Asset Management executive Jeffrey Spotts, bringing an abrupt end to a closely watched case linked to the collapse of the hedge fund firm and the activities of its founder, Brian Kahn, according to a report by Bloomberg.
The decision, filed in federal court in New Jersey on Friday, ends a prosecution that alleged Spotts participated in a scheme that misled investors about the management and risk profile of hundreds of millions of dollars in hedge fund assets.
The dismissal comes just weeks before Spotts was due to stand trial and follows a series of legal disputes involving evidence connected to Kahn, who previously pleaded guilty to securities fraud-related charges.
Spotts had consistently denied wrongdoing throughout the proceedings.
His attorney, Lee Vartan, described the outcome as a complete vindication, arguing that his client had been misled by others involved in the firm rather than participating in any fraudulent activity.
No public explanation accompanied the government’s request to dismiss the indictment.
The case appeared to unravel after prosecutors disclosed that aspects of the evidence relating to Kahn involved classified information that could not be publicly disclosed.
Court filings indicate that extensive sealed proceedings took place before US District Judge Michael Shipp as both sides debated how the information could be handled at trial.
Last month, prosecutors informed defence counsel that Kahn would no longer be called as a witness, despite expectations that he would provide key testimony against Spotts. Kahn and former Prophecy executive John Hughes had both entered guilty pleas and were viewed as central witnesses for the government.
Following the government’s dismissal request, Judge Shipp formally closed the criminal case.
The development raises questions about the viability of prosecutions that rely heavily on cooperating witnesses when evidentiary restrictions limit the government’s ability to present its case.
The criminal proceedings stemmed from the 2020 collapse of Prophecy Asset Management, a hedge fund operation that attracted investor capital by promoting a diversified trading platform managed through a network of external sub-advisers.
According to prosecutors, investors were told that risk was spread across numerous independent trading managers and that strict controls governed capital allocation and collateral requirements.
Authorities later alleged that Kahn controlled the vast majority of the firm’s leveraged assets, creating a level of concentration risk that had not been disclosed to investors.
In a guilty plea entered in December, Kahn admitted participating in a conspiracy to commit securities fraud connected to Prophecy’s operations. Prosecutors alleged that investors were misled about how capital was managed and about the financial condition of the business before its collapse.
Kahn is awaiting sentencing and faces a potential prison term.
The repercussions of the Prophecy collapse have extended well beyond the alternatives sector.
Kahn simultaneously built retail holding company Franchise Group into a publicly listed business while maintaining undisclosed involvement in Prophecy’s trading activities, according to court filings.
Franchise Group was taken private in a $2.8bn transaction in 2023 backed by B Riley Financial. The company subsequently filed for bankruptcy in 2024, with scrutiny surrounding Kahn’s financial dealings contributing to broader concerns among investors and creditors.
The fallout also placed pressure on B. Riley, now operating as BRC Group Holdings, and prompted regulatory scrutiny of the investment bank. The firm has repeatedly stated that internal investigations found no evidence that it was aware of Kahn’s conduct at Prophecy.
While the criminal case against Spotts has now been dismissed, regulatory action tied to the fund’s collapse remains ongoing.
The US Securities and Exchange Commission previously filed civil fraud claims against Spotts, Kahn and Hughes. Those proceedings are currently paused and have yet to reach a resolution.
