The U.S. Securities and Exchange Commission (SEC) is accusing a New York-based asset manager of running a years-long deception that allegedly lured investors with promises their capital was safe.
According to an SEC complaint, Prophecy Asset Management and its chief executive, Jeffrey Spotts, raised more than half a billion dollars by claiming investor funds were protected through a network of professional traders who posted cash collateral to offset losses.
Instead of allocating investor funds to sub-advisers who traded liquid securities, the SEC alleges that a huge chunk of the money went to one sub-adviser, Brian Kahn, whose trades produced steep losses that far exceeded his posted collateral.
The SEC says Spotts, Kahn and Prophecy’s chief compliance officer, John Hughes, created fake documents and executed sham transactions to conceal the mounting losses from auditors and administrators.
By March 2020, the losses had ballooned beyond $350 million, forcing Prophecy to suspend investor withdrawals indefinitely.
“According to the SEC’s complaint, Prophecy Asset Management raised over $500 million between 2014 and 2020 for hedge funds it advised, misleading investors to believe that their investments were protected from loss.”
The SEC is charging Prophecy, Spotts and Kahn with violating the antifraud provisions of the Securities Act, the Exchange Act and the Investment Advisers Act. Prophecy and Spotts are also charged with violating Exchange Act Rule 10b-5(b) and Advisers Act Rule 206(4)-8(a)(1).
The regulator seeks injunctions, civil penalties and disgorgement of profits, along with officer-and-director bars against Spotts and Kahn.
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