Fugitive ex-CEO arrested on investor fraud charges

Fugitive ex-CEO arrested on investor fraud charges
Politics

Hercules Investments CEO and CIO James McDonald.

CNBC

A former investment company CEO who previously appeared as a paid contributor to CNBC was arrested on fraud charges after more than two years as a fugitive from a Securities and Exchange Commission investigation, federal prosecutors said.

The defendant, James Arthur McDonald Jr., is accused of misrepresenting to investors how he would use millions of dollars he raised from them between 2019 and 2021, and also hid “massive losses” from investors that his company Hercules Investments LLC had sustained, according to an indictment in U.S. District Court in Los Angeles.

McDonald’s arrest Saturday at a residence in Port Orchard, Washington, came nearly two months after a federal judge found him civilly liable for more than $3.8 million in damages to the SEC for violating securities laws.

The 52-year-old was ordered held without bail Monday by a judge in Tacoma, Washington, federal court, who ruled he was a flight risk.

McDonald agreed to be transferred from Washington to Los Angeles within weeks, to face charges there of one count of securities fraud, one count of wire fraud, three counts of investment adviser fraud, and two counts of engaging in monetary transactions in property derived from unlawful activity.

He faces a maximum possible sentence of 20 years in prison if convicted of either the securities fraud or wire fraud count alone.

A 2022 affidavit from an FBI agent seeking McDonald’s arrest notes that “McDonald was also a paid contributor on CNBC and appeared on CNBC programs several times in late 2020 and in 2021, commenting on topics ranging from stock recommendations based on businesses likely to see growth during and after the COVID-19 pandemic to the ‘disconnect between Main Street and Wall Street’ in terms of market exuberance despite the pandemic’s lingering challenges.”

The wanted poster for James Arthur McDonald Jr.

Courtesy: FBI Los Angeles Field Office

That affidavit also says that McDonald regularly described himself in promotion materials to investors as having a bachelor’s degree in economics from Harvard University, when in fact he graduated the Harvard Extension School. That school is not a traditional college and does not offer bachelor’s degrees in economics.

“McDonald’s trascripts from the Harvard Extension School list his concentration as ‘Social Sciences,’ and only one of the sixteen classes he took … appears to be an economics class,” the affidavit said.

Hercules, which was one of two firms that McDonald headed, in late 2020 lost between $30 million to $40 million of clients’ investments on risky short positions that McDonald took “that effectively bet against the health of the United States economy in the aftermath of the U.S. presidential election,” the Los Angeles U.S. Attorney’s Office said in a press release.

McDonald’s bet would have paid off if the election caused “big selloffs that would cause the stock market to drop,” according to the 2022 FBI affidavit. “But the market did not drop as McDonald had hoped.”

McDonald, 52, allegedly spent nearly $175,000 of the $675,000 raised from one group of victim investors at a Porsche dealership, transferred another $109,512 of their funds to the landlord of a home he was renting in California, and spent about $6,800 of their money on a website that sold designer mensswear, the indictment against him says.

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McDonald went on the lam in November 2021 after failing to appear for scheduled testimony before the SEC to testify about his alleged defrauding of investors in what he had pitched to them as a plan to launch a mututal fund under the ticker symbol “NFLHX.” The ticker would have been a nod to McDonald’s affection for NFL football.

“Prior to fleeing, McDonald also appeared to have terminated his previous phone and email accounts and told one person that he planned to ‘vanish,’ ” prosecutors said.

McDonald is also accused of falsely representing to clients of his other firm, Index Strategy Advisors in Redondo Beach, that he was a registered investment advisor, despite having withdrawn the firm as a state-registerd investment advisor firm in May 2019.

“McDonald misappropriated ISA’s client funds by using them to pay his personal expenses, pay Hercules’s clients and/or creditors, and pay Ponzi-like returns to investors to create the false impression that ISA was a successful firm,” the indictment says.

“McDonald falsely represented to ISA’s clients that their funds would be held in individual accounts. Instead, defendant McDonald commingled ISA’s client funds with Hercules’s client funds and personal fund.”

In the case of one ISA client who had invested about $351,000 and who later “needed the money to make a down payment on a home, was informed by McDonald that much of the money had been lost, and never got his full investment back,” prosecutors said.

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