The founder of an investment company has been charged with conspiring to defraud millions from victim investors, the U.S. Attorney’s Office for New Jersey announced.
Jeffery Spotts, 58, of Summit, was arraigned in federal court on Monday. He faces an indictment charging him with one count each of conspiracy to commit wire fraud, wire fraud, conspiracy to commit securities fraud and securities fraud.
Spotts is the co-founder and former CEO of Prophecy Asset Management LP, the office said.
John Hughes, 58, of Mahwah, previously pleaded guilty to securities fraud charges stemming from the same scheme. He is scheduled to be sentenced in March.
Prophecy solicited investments and operated funds that, at their peak, had over $360 million in assets under general management. Spotts co-founded Prophecy with Hughes and operated as the CEO and portfolio manager.
The two conspired from January 2015 to March 2020 to falsely represent to investors that Prophecy employed a “first-loss” trading strategy that purportedly allocated investor money to a diverse array of traders, called sub-advisors, who were required to provide cash collateral in order to gain access to the investors is pooled money and backstop any potential losses, authorities say.
Spotts and Hughes also falsely represented to investors that if a sub-advisor began to experience trading losses that approach the amount of their required cash collateral, Prophecy would contact the sub-advisor to increase or replenish their collateral and, if necessary, suspend allocations and trading, or even terminate the sub-advisor if losses were substantial.
These false claims induced victims to believe that Prophecy operated low risk, transparent and diversified funds, according to authorities.
Spotts and Hughes eventually allocated most of the money to a single, primary sub-advisor without requiring him to provide cash collateral to back potential losses, authorities say.
They also failed to suspend his allocations or trading even though he sustained approximately $290 million in losses that far exceeded his cash collateral.
Spotts and Hughes fraudulently concealed this and other information from victim investors, causing them to incorrectly believe their investments were far more secure. They also, along with the sub-advisor, covered up the spiraling losses and collateral deficiencies by using bogus transactions and forged documents, authorities said.
The sub-advisor then helped Spotts and Hughes conceal millions of dollars in losses they caused to the company’s funds through bad investments. They use fake documents and money that the sub-advisor provided to paper over and hide these bad investments from investors and the company’s auditor.
Authorities have not identified the sub-advisor.
The fraud resulted in trading losses that wiped out the company’s funds and caused over $294 million in losses to the victims, authorities said.
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