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Regulation and Compliance > Litigation

Ex-CNBC Guest Analyst and Advisor, Thought to Be in Hiding, Is Charged With Fraud

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What You Need to Know

  • James Arthur McDonald Jr. allegedly lost millions of dollars of client funds in risky trading and misappropriated millions more.
  • He failed to testify before the SEC, closed phone and email accounts and told someone he planned to vanish, according to the DOJ.

A former advisor who served as a frequent guest analyst on CNBC financial TV news shows who is believed by investigators to be in hiding was charged Wednesday with securities fraud on complaints that he lost tens of millions of dollars of clients’ investments and misused money from a purported capital raise.

Separate actions were filed in U.S. District Court for the Central District of California by the Justice Department and the Securities and Exchange Commission.

The Justice Department charged James Arthur McDonald Jr., 50, formerly of Arcadia, California, with one count of securities fraud, a crime punishable by up to 20 years in federal prison, it said.

McDonald ran two Los Angeles County-based investment companies: Hercules Investments, based in downtown Los Angeles, and Index Strategy Advisors (ISA), based in Redondo Beach, serving as the CEO and chief investment officer of each firm, the Justice Department noted.

According to an affidavit by Robert Chowthi, a special agent with the Federal Bureau of Investigation, that was filed with the Justice Department’s complaint, McDonald “lost tens of millions of dollars of Hercules investor funds after adopting a risky short position that effectively bet against the health of the U.S. economy in the wake of the 2020 presidential election.”

McDonald predicted that the COVID-19 pandemic and election would result in major selloffs that would cause the stock market to tumble, according to the Justice Department. When that result failed to materialize, Hercules clients lost between $30 million and $40 million, according to the affidavit.

By December 2020, Hercules clients were complaining to that firm’s employees about the losses in their accounts, according to the Justice Department.

In early 2021, McDonald “solicited further funds from investors in the form of a purported capital raise” for Hercules, according to Chowthi.

“In doing so, he misrepresented how the funds would be used and failed to disclose the massive losses Hercules had previously sustained,” Chowthi alleged.

As an example, Chowthi noted that, in connection with the Hercules capital raise, McDonald obtained $675,000 in investment funds from one victim group on March 9, 2021. McDonald then “misappropriated those funds in various ways, including spending roughly $174,610 of them at a Porsche dealership,” according to Chowthi.

About $109,512, meanwhile, was transferred to the landlord of a home McDonald was renting in Arcadia and about $6,800 was spent on a website selling designer menswear, according to the Justice Department.

The FBI’s investigation also revealed McDonald’s “fraudulent capital raise is part of a broader pattern of deceptive conduct, which includes the creation of false account statements for ISA clients, his ongoing misrepresentation to clients that ISA was a registered investment adviser even after he had terminated its registration, and even misleading statements about his educational background,” Chowthi alleged.

McDonald also allegedly falsely represented to clients that ISA was a registered investment advisor even though he had withdrawn ISA as a state-registered advisory firm in May 2019, the Justice Department said.

McDonald also allegedly sent ISA clients false account statements, including for one client who invested about $351,000, later needed the money to make a down payment on a house, was informed by McDonald that much of the money had been lost, and never received his full investment back, according to the Justice Department.

Although McDonald was subpoenaed to testify before the SEC in the fall of 2021, he did not appear as required, Chowthi noted. “Based on my review of measures McDonald has taken since then, I believe he has consciously gone into hiding,” according to Chowthi.

According to the Justice Department complaint, McDonald also “appears to have terminated his previous phone and email accounts and told one person that he planned to ‘vanish.’”

Anyone with information about McDonald’s whereabouts is being encouraged by the FBI to call its Los Angeles Field Office at (310) 477-6565.

The SEC’s Action

The SEC’s civil injunctive action named McDonald and Hercules as defendants and alleged they were connected to two fraudulent securities offerings.

The SEC alleged that McDonald raised over $5.1 million from 23 investors and clients, and misappropriated more than $2.9 million of those funds for personal expenses and Ponzi-like payments to earlier investors.

The SEC’s complaint alleged he 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, and that McDonald used less than 50% of those funds for trading and didn’t engage in any trading with the funds for long stretches of time.

Instead, the SEC alleged, McDonald misappropriated over $1 million of the funds for personal expenses, including luxury vehicles and paying rent on his home, and misappropriated more than $2 million of the funds for Ponzi-like payments to Hercules’ investment adviser clients and expenses associated with operating Hercules.

The SEC also alleged that, from February 2021 to October 2021, McDonald raised $1.5 million through the sale of equity investments in Hercules’ business.

According to the SEC complaint, McDonald falsely represented that investor funds would be used to expand Hercules’ business, lied about the firm’s financial condition, and didn’t disclose he had promised Hercules clients that the firm would repay earlier losses.

The SEC also alleged that McDonald commingled the investor funds with Hercules assets and his personal assets, and used $440,000 of those funds for personal expenses, including to pay his personal credit card bills.

The complaint seeks permanent injunctions, disgorgement with prejudgment interest, and civil penalties against McDonald and Hercules.

(Image: Adobe Stock)