Arcadia Man Charged with Securities Fraud for Stealing Client Funds and Concealing His Investment Firm’s Massive Financial Losses
LOS ANGELES – A former San Gabriel Valley resident who ran Los Angeles County-based investment companies and was a frequent guest on financial television news programs was charged today in a federal criminal complaint alleging he lied to investors.
James Arthur McDonald Jr., 50, formerly of Arcadia and who is believed to be in hiding, is charged with one count of securities fraud, a crime punishable by up to 20 years in federal prison.
According to an affidavit filed with the complaint, McDonald frequently appeared as an analyst on the CNBC financial TV news network and was the CEO and chief investment officer of two companies: Hercules Investments LLC, based in downtown Los Angeles, and Index Strategy Advisors Inc. (ISA), based in Redondo Beach.
In late 2020, McDonald lost tens of millions of dollars of Hercules client money after adopting a risky short position that effectively bet against the health of the United States economy in the aftermath of the U.S. presidential election. McDonald projected that the COVID-19 pandemic and the election would result in major selloffs that would cause the stock market to drop. When the market decline didn’t occur, Hercules clients lost between $30 million and $40 million, according to the affidavit. By December 2020, Hercules clients were complaining to company employees about the losses in their accounts.
Since McDonald’s compensation for his investment advisory services primarily was based on a percentage of assets under his management – typically 2% of a client’s total assets held by Hercules – the massive losses to Hercules clients significantly decreased the fees McDonald was entitled to collect.
In early 2021, McDonald solicited millions of dollars' worth of funds from investors in the form of a purported capital raise for Hercules but misrepresented how the funds would be used and failed to disclose the massive losses Hercules previously sustained. McDonald – an avid football enthusiast – stated that he planned to launch a publicly traded mutual fund under the ticker symbol “NFLHX.” The losses to Hercules clients and the potential for litigation related to those losses jeopardized the success of that fund because any litigation would have had to be publicly disclosed.
As part of the capital raise, McDonald obtained $675,000 in investment funds from one victim group on March 9, 2021. He then misappropriated those funds in various ways, including spending roughly $174,610 of them at a Porsche dealership. Approximately $109,512 was transferred to the landlord of a home McDonald was renting in Arcadia; and approximately $6,800 was spent on a website that sells designer menswear.
McDonald allegedly also falsely represented to clients that ISA, his other firm, was a registered investment adviser, even though he had withdrawn ISA as a state-registered investment adviser firm in May 2019. He also allegedly sent ISA clients false account statements, including for one client who invested approximately $351,000, 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.
The United States Securities and Exchange Commission subpoenaed McDonald to testify before it in November 2021, but – without advance notice – he failed to appear as required. According to the 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 encouraged to call the FBI’s Los Angeles Field Office at (310) 477-6565.
A complaint contains allegations that a defendant has committed a crime. Every defendant is presumed innocent until and unless proven guilty beyond a reasonable doubt.
The FBI and IRS Criminal Investigation investigated this matter. The SEC filed a civil complaint today charging McDonald and Hercules with violations of federal securities law.
Assistant United States Attorneys Carolyn S. Small and Alexander B. Schwab of the Major Frauds Section are prosecuting this case.