John Hughes, the co-founder, president and chief compliance officer of Prophecy Asset Management, yesterday pleaded guilty to defrauding dozens of clients out of $294 million, said the U.S. Attorney’s Office for the District of New Jersey.

According to the statement, Hughes, a 56-year-old resident of Mahwah, N.J., and his co-founding partner—identified in the firm’s latest Form ADV filing as Jeffrey R. Spotts—operated investment funds that held more than $360 million.

From January 2015 to March 2020, Hughes and Spotts told their clients that the firm used a “first-loss” trading strategy in which the firm would allocate funds to a diverse pool of subadvisors who had to provide cash collateral in order to backstop potential losses, the statement said, adding that because of this and related false claims, the firm’s clients believed their money was invested in low-risk, transparent and diversified funds.

“In reality, over time, Hughes and his co-founder allocated most of the funds’ capital to a single, primary subadvisor 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 statement said. “Hughes, his co-founder, and the subadvisor also actively covered up these spiraling losses and collateral deficiencies by using, among other things, bogus transactions and forged documents.”

Hughes pleaded...

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