Fugitive ex-CEO arrested on investor fraud charges

A former investment firm 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 research, federal prosecutors said.

The defendant, James Arthur McDonald Jr., is accused of misrepresenting to investors how he would use the millions of dollars he raised from them between 2019 and 2021, as well as concealing “massive losses” from investors that his company Hercules Investments LLC had persisted, said one indictment in U.S. District Court in Los Angeles.

McDonald's arrest Saturday at a home 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 held without bail on Monday by a judge in federal court in Tacoma, Washington, who ruled he posed a flight risk.

McDonald agreed to be transferred from Washington to Los Angeles within weeks, where he would be indicted on one count of securities fraud, one count of bank fraud, three counts of investment adviser fraud and two counts of engaging in monetary transactions with property that resulted from an unlawful act. activity.

He faces a maximum possible prison sentence of 20 years if convicted of the securities fraud or bank fraud charges alone.

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

That statement also states that McDonald frequently described himself in promotional materials to investors as having a bachelor's degree in economics from Harvard University, when in fact he graduated from Harvard Extension School. That school is not a traditional college and does not offer bachelor's degrees in economics.

“McDonald's transcripts from 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, one of two companies McDonald led, lost between $30 million and $40 million in client investments at the end of 2020 on risky short positions McDonald took “that were essentially betting on the health of the U.S. economy in the wake of the crisis. U.S. presidential election,” the U.S. Attorney's Office in Los Angeles said in a press release.

According to the 2022 FBI affidavit, McDonald's bet would have paid off if the election “caused a major sell-off that would send the stock market down.” “But the market didn't fall as McDonald had hoped.”

McDonald, 52, allegedly spent nearly $175,000 of the $675,000 raised from a group of victim investors at a Porsche dealership, transferred another $109,512 of their money to the landlord of a home he rented in California, and approximately Spending $6,800 of their money on a website that sold designer men's clothing, the charges against him state.

McDonald went on the run in November 2021 after failing to appear for a scheduled deposition before the SEC to testify about his alleged defrauding of investors in what he pitched to them as a scheme to launch a mutual fund under the ticker symbol 'NFLHX '. The ticker is said to have been a nod to McDonald's affection for NFL football.

“Before fleeing, McDonald also appeared to have terminated his previous phone and email accounts and told one person he planned to 'disappear,'” 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 withdrawing from the firm as a state registered investment advisor firm in May 2019.

“McDonald embezzled ISA customers' funds by using them to pay his personal expenses, pay off Hercules' customers and/or creditors, and pay Ponzi-like returns to investors to create the false impression that ISA was a successful company,” the complaint said.

“McDonald falsely represented to ISA customers that their funds would be held in individual accounts. Instead, Defendant McDonald commingled ISA customer funds with customer funds and Hercules' personal fund.”

In the case of an ISA client who had invested approximately $351,000 and who later 'needed the money to make a down payment on a house, was informed by McDonald that a large portion of the money had been lost and his entire investment never got it back,” prosecutors said.