Jeffrey Spotts, Securities Fraud, New Jersey 2024

TRENTON, N.J. – In a shocking turn of events, Jeffrey Spotts, 58, of Summit, New Jersey, was arraigned today on charges of conspiring to defraud dozens of victim investors out of $294 million in funds, according to Acting U.S. Attorney Alina Habba.

Spotts, a former co-founder and top executive of Prophecy Asset Management LP, was charged with one count each of conspiracy to commit wire fraud, wire fraud, conspiracy to commit securities fraud, and securities fraud. His co-conspirator, 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.

However, 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. The sub-advisor, along with Spotts and Hughes, actively covered up these spiraling losses and collateral deficiencies by using, among other things, bogus transactions and forged documents.

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.

Habba also expressed appreciation for the Securities and Exchange Commission, under the direction of Margaret Ryan, Director, Division of Enforcement. This case is a stark reminder of the importance of protecting investors and ensuring that those who engage in fraudulent activities are held accountable.

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