SEC charges president, CCO of Prophecy Asset Management with fraud

John Hughes and his associates at Prophecy, which advised hedge funds and reported more than $500 million in assets under management, misled investors, auditors, and the funds’ administrator about the funds’ trading practices, risk, and performance, the SEC alleged in its complaint, filed Thursday in U.S. District Court for the District of New Jersey.

In a related matter, Hughes pleaded guilty to an information charging him with one count of conspiracy to commit securities fraud., the Department of Justice announced.

Hughes led investors to believe their funds were dispersed across dozens of liquid securities and that the subadvisers who managed them had abundant cash reserves. Instead, most of the funds’ capital was handled by one subadviser who experienced large losses and didn’t have the cash to cover the funds, the SEC alleged.

Hughes directed the funds to invest in illiquid investments, resulting in large losses, the SEC said. He allegedly fabricated documents and engaged in sham transactions in an effort to hide the losses.

The SEC charged Hughes with antifraud violations of the federal securities laws and is seeking a permanent injunction, disgorgement plus interest, civil penalties, and an officer-and-director bar.

“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,” said Nicholas Grippo, regional director of the SEC’s Philadelphia regional office, in a press release. “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.”

Hughes’s counsel, Ian Roffman of law firm Nutter, didn’t respond to a request for comment.