U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 25889 / November 2, 2023
Securities and Exchange Commission v. John Hughes, No. 3:23-cv-21816 (D.N.J. filed November 2, 2023)
SEC Charges President/CCO of Prophecy Asset Management Advisory Firm with Multi-Year Fraud
The Securities and Exchange Commission today charged John Hughes, president and chief compliance officer of registered investment adviser Prophecy Asset Management LP, 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 $500 million 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 the United States District Court for the District of New Jersey, charges Hughes with violating the antifraud provisions of Sections 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder, and seeks a permanent injunction, disgorgement with prejudgment interest, a civil penalty and an officer and director bar.
In a parallel action, the U.S. Attorney’s Office for the District of New Jersey announced criminal charges against Hughes.
The SEC’s ongoing investigation is being conducted by Burk Burnett and Julia C. Green of the Philadelphia Regional Office, under the supervision of Regional Director Nicholas P. Grippo and Associate Regional Director Scott A. Thompson. John V. Donnelly III and Gregory Bockin will lead the litigation. This matter arose out of a referral from the Philadelphia Regional Office’s Examination Program. The SEC expresses appreciation to the U.S. Attorney’s Office for the District of New Jersey and the FBI.