the staff of the Ridgewood blog
Mahwah NJ, – A former co-founder and top executive of Prophecy Asset Management LP was arraigned today on charges of conspiring to defraud dozens of victim investors out of $294 million in funds, Acting U.S. Attorney and Special Attorney Alina Habba announced.
Jeffrey Spotts, 58, of Summit, New Jersey, was arraigned today before U.S. District Court Judge Michael A. Shipp in Trenton federal court on an indictment charging him with one count each of conspiracy to commit wire fraud, wire fraud, conspiracy to commit securities fraud, and securities fraud.
One of Spotts’s co-conspirators, John Hughes, 58, of Mahwah, New Jersey, previously pled guilty to securities fraud charges stemming from the same scheme.
According to the indictment:
Prophecy solicited investments and operated funds that, at their peak, had over $360 million in assets under management. Spotts co-founded Prophecy, with Hughes, and worked as its Chief Executive Officer and Portfolio Manager. From January 2015 to March 2020, Spotts conspired with Hughes 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’ pooled money and backstop any potential losses. Spotts and Hughes 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, over time, Spotts and Hughes allocated most of the Funds’ capital to a single, primary 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. Spotts and Hughes fraudulently concealed this and other information from victim investors, causing the victims to believe their investments were far more secure than they actually were. Spotts, Hughes and the sub-advisor also actively covered up these spiraling losses and collateral deficiencies by using, among other things, bogus transactions and forged documents.
In turn, the sub-advisor helped Spotts and Hughes conceal millions of dollars in losses they caused to Prophecy’s funds through bad investments. Spotts, Hughes and the sub-advisor used fake documents and money that the sub-advisor provided to paper over and hide these bad investments from victim investors and Prophecy’s auditor.
The fraud ultimately resulted in substantial trading losses that wiped out Prophecy’s funds and caused over $294 million in losses to the victims.
The conspiracy to commit wire fraud and wire fraud charges each carry a maximum penalty of 20 years in prison and a $250,000 fine, the conspiracy to commit securities fraud charge carries a maximum penalty of 5 years in prison and a $250,000 fine, and the securities fraud charge carries a maximum penalty of 20 years in prison and a $5,000,000 fine. Sentencing for Hughes is scheduled for March 10, 2026.
The U.S. Securities and Exchange Commission (SEC) also filed a civil complaint against Spotts based on the same and additional conduct and had previously filed a civil complaint against Hughes.
Acting U.S. Attorney and Special Attorney Habba credited special agents of the FBI, under the direction of Special Agent in Charge Wayne A Jacobs, Philadelphia Division, with the investigation leading to today’s charges. She also expressed appreciation for the Securities and Exchange Commission, under the direction of Margaret Ryan, Director, Division of Enforcement.
The government is represented by Assistant U.S. Attorneys Aaron L. Webman of the U.S. Attorney’s Office Economic Crimes Unit in Newark and Martha K. Nye, Attorney-in-Charge of the U.S. Attorney’s Office in Trenton.
The charges and allegations contained in the indictment are merely accusations, and the defendant is presumed innocent unless and until proven guilty.
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