Former NJ Executive at Investment Fund Admits $294M Fraud Conspiracy

A co-founder and former top executive of an investment fund has admitted his role in conspiring to defraud dozens of victim investors out of a staggering $294 million.

Federal authorities say on Thursday in Trenton federal court, 56-year-old John Hughes of Mahwah pleaded guilty to one count of conspiracy to commit securities fraud.

• Hughes co-founded Prophecy Asset Management LP ("Prophecy") and worked as its chief operating officer and chief compliance officer
• Prophecy solicited investments and operated funds that, at their peak, had over $360 million in assets under management

According to officials, from the beginning of 2015 through March 2020, Hughes conspired with his co-founder to falsely represent to investors that Prophecy employed a "first-loss" trading strategy that purportedly allocated investor money to a diverse array of traders, known as sub-advisors, who were required to provide cash collateral in order to gain access to the investors’ pooled money and backstop any potential losses.

Hughes and his co-founder also falsely represented to investors that if a sub-advisor began to experience trading losses that approached 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.

In reality, Hughes and his co-founder eventually allocated most of the funds’ capital to one sub-advisor without requiring him to provide cash collateral to back potential losses.

They also failed to suspend his allocations or trading, even though he sustained approximately $290 million in losses that far exceeded his cash collateral.

Hughes and his co-founder fraudulently concealed this and other information from victims, causing them to believe their investments were far more secure than they actually were.

Hughes, his co-founder, and the sub-advisor actively covered up these mounting losses and collateral deficiencies by using, among other things, bogus transactions and forged documents, according to officials.

The fraud ultimately resulted in trading losses that wiped out Prophecy’s funds and caused over $294 million in losses to the victims.

The conspiracy to commit securities fraud charge that Hughes is facing carries a maximum penalty of five years in prison and a $250,000 fine.

Sentencing is scheduled for March 21st.

The U.S. Securities and Exchange Commission (SEC) has also filed a civil complaint against Hughes based on the same and additional conduct.