James Arthur McDonald Jr., a former CNBC financial analyst accused of defrauding investors, was arrested by the FBI on Saturday after he went on the run for almost three years. According to PEOPLE, the 52-year-old was arrested at a residence in Port Orchard, Washington.
The U.S. Attorney’s Office, Central District of California in a statement on Monday said that in November 2021, McDonald was expected to appear before the United States Securities and Exchange Commission to testify after he was accused of defrauding investors. However, he did not show up, and authorities considered him a fugitive since then.
Before going on the run, authorities said McDonald “appeared to have terminated his previous phone and email accounts and told one person that he planned to ‘vanish.’” “Since then, a federal grand jury in Los Angeles in January 2023 returned a seven-count indictment against McDonald,” the statement added.
The indictment states that the 52-year-old suspect was the CEO and chief investment officer of two companies named Hercules Investments LLC (based in downtown Los Angeles) and Index Strategy Advisors Inc. (based in Redondo Beach). The statement also said McDonald made frequent appearances as an analyst on the CNBC financial television news network.
“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,” the statement said.
“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. By December 2020, Hercules clients were complaining to company employees about the losses in their accounts.”
Prosecutors said the huge losses to Hercules largely decreased the fees McDonald was supposed to gain as his “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.”
McDonald in 2021 “solicited millions of dollars’ worth of funds from investors in the form of a purported capital raise for Hercules but allegedly misrepresented how the funds would be used and failed to disclose the massive losses Hercules previously sustained,” the statement also said.
The statement continued: “McDonald – an avid football enthusiast – stated that he planned to launch a 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.”
Prosecutors said that on March 9, 2021, McDonald received a $675,000 investment fund from one group. But he allegedly did not use the funds for their intended purposes as he spent about $174,610 of the money at a Porsche dealership. He also allegedly transferred about $109,512 to a landlord of a home he was renting, authorities said, adding he also spent $6,800 on a designer menswear website.
“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,” the statement said.
“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 statement said a civil complaint alleging violations of federal securities law was filed against McDonald and Hercules by the SEC in September 2022. “On April 21, United States District Judge Percy Anderson found McDonald liable for a total of approximately $3,810,346, which represented his net profits gained because of the alleged conduct,” authorities said.
McDonald has been charged with 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 up to 35 years in prison if convicted. Authorities said he is expected to be extradited to Los Angeles in the coming weeks to face federal charges.
