Profitable Investment Scheme Is Actually a Sham
The point of investing is to try and make additional money by investing the funds profitably. The crucial point for investors is thus the returns an investment strategy generates – no returns, no investors; big returns, lots of investors.
The point is illustrated by the Commission’s newest case involving a group of investors who continually placed their funds into two investment vehicles, one called Prophecy (really a group of funds) and the other called Special Opportunities. The two funds were operated by Prophecy Asset Management, LP, a New York based firm called PAM, and individuals Jeffrey Spots and Brian Kahn.
Defendants Spots and Hughes, along with PAM (previously a registered investment adviser) raised over $500 million from investors who were convinced to trust their funds to Defendants despite the fact that the two funds continued to lose money. The investments in the two funds created in excess of $15 million and incentive fees.
Defendants used what they claimed was a “first loss” business model. This model supposedly allocated Prophecy’s capital to dozens of sub-advisors. Those advisers were required to trade in liquid securities and post cash collateral to absorb losses generated by the trading.
In reality, Defendants PAM, Spotts and Hughes caused the trading to be conducted in high risk investments for which they undertook little work. Defendants concealed these facts by fabricating documents which depicted successful trades. Those documents and so-called “fact sheets” were shown to investors. The documents depicted successful trades and due diligence to select the investments. All that work – reflected in the documents – supposedly generated success. Those strategies were supposedly augmented by other “trading strategies” shared with investors. Thus, by the end of March 2020 investors were told there were profits for each quarter, not $350 million in losses, the true facts. Defendants had $15 million in fees charged for the trades.
The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Rule 10b-5, and Advisers Act Sections 206(1), (2), and (4) and Rule 206(4)-8. The U.S. Attorney’s Office for the District of New Jersey filed a parallel action as to Defendant Spotts. See Lit. Rel. No. 26414 (Sept. 29, 2025).