The Securities and Exchange Commission (SEC) has filed a civil injunctive action against James Arthur McDonald, Jr.
The SEC noted that McDonald was previously a guest commentator for CNBC – the leading financial news network.
The charges were filed against McDonald and his SEC-registered investment adviser firm, Hercules Investments, LLC. The allegations involved two securities offerings that raised over $5.1 million from 23 investors and clients. The SEC claims that the defendants misappropriated more than $2.9 million of those funds for personal expenses and Ponzi-like payments to earlier investors.
The SEC reported that in a parallel action, the United States Attorney’s Office for the Central District of California announced criminal charges against McDonald.
The AG’s office states:
“In late 2020, McDonald lost tens of millions of dollars of Hercules client money after adopting a risky short position that effectively bet against the health of the United States economy in the aftermath of the U.S. presidential election. McDonald projected that the COVID-19 pandemic and the election would result in major selloffs that would cause the stock market to drop. When the market decline didn’t occur, Hercules clients lost between $30 million and $40 million, according to the affidavit. By December 2020, Hercules clients were complaining to company employees about the losses in their accounts.”
Adding:
“In early 2021, McDonald solicited millions of dollars’ worth of funds from investors in the form of a purported capital raise for Hercules but misrepresented how the funds would be used and failed to disclose the massive losses Hercules previously sustained. McDonald – an avid football enthusiast – stated that he planned to launch a publicly traded mutual fund under the ticker symbol “NFLHX.” The losses to Hercules clients and the potential for litigation related to those losses jeopardized the success of that fund because any litigation would have had to be publicly disclosed.”
The US Department of Justice reports that McDonald is believed to be in hiding explaining that McDonald appears to have terminated his previous phone and email accounts and told one person that he planned to “vanish.”
The SEC’s complaint alleges that McDonald raised over $3.6 million from investors between May 2019 and October 2021 for the stated purpose of trading securities through an investment vehicle called the Index Strategy Advisors Fund. The SEC claims that less than halfof the funds were used for trading with part of the money utilized to pay for an “extravagant lifestyle” including rent on his “luxury home,” hundreds of thousands of dollars in credit card expenses and luxury vehicles.
The SEC also alleges that, from February 2021 to October 2021, McDonald raised $1.5 million through the sale of equity investments in Hercules’s business. The complaint claims that McDonald lied about the firm’s financial condition and investor funds were comingled with his own.
The SEC’s complaint, filed in the Central District of California, charges McDonald and Hercules with violating the antifraud provisions. The complaint also charges McDonald with violating the Advisers Act which prohibits certain transactions by investment advisers. The complaint seeks permanent injunctions, disgorgement with prejudgment interest, and civil penalties against McDonald and Hercules.
The DOJ has charged McDonald with one count of securities fraud, a crime punishable by up to 20 years in federal prison. All individuals are considered innocent until proven guilty.
Update: A CNBC spokesperson has informed CI that as soon as they discovered McDonald was under investigation he was no longer on the air at CNBC.