The Securities & Exchange Commission today charged John Hughes, president & 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 & reported more than $500 million in assets under management. The SEC’s complaint alleges that Hughes & his associates at Prophecy Asset Management misled the funds’ investors, auditors, & administrator about the funds’ trading practices, risk, & 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 & 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 & 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 & trading strategies in two other funds. By 2020, after losses in funds that Prophecy Asset Management managed amounted to more than $350 million, Hughes & Prophecy Asset Management indefinitely suspended redemptions by investors.

“We allege that John Hughes committed a brazen & sophisticated fraud that deceived investors to keep Prophecy Asset Management & the funds afloat, despite massive undisclosed trading losses. But the collapse was inevitable,” said Nicholas P. Grippo, Regional Director of the SEC’s Philadelphia Regional Office. “As president & CCO, Hughes served in an important gatekeeping role & 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 & expose fraud by investment advisers.”

The SEC’s complaint, filed in U.S. District Court for the District of New Jersey, charges Hughes with violations of the antifraud provisions of the federal securities laws & seeks a permanent injunction, disgorgement of ill-gotten gains plus interest, civil penalties, & an officer & 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 & Julia C. Green of the Philadelphia Regional Office, under the supervision of Associate Regional Director Scott A. Thompson & Mr. Grippo. John V. Donnelly III & 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 & the FBI.