In a case that arose out of an examination referral, the SEC charged a hedge fund manager who raised more than $500 million in assets, Prophecy Asset Management LP, and its CEO and Chief Investment Officer, Jeffrey Spots, as well as a co-conspirator sub-adviser, Brian Kahn, for a multi-year fraud that purportedly concealed hundreds of million of dollars in losses from investors. The SEC's complaint noted that the firm misled investors, telling them that the funds' capital was allocated among dozens of sub-advisers who traded in liquid securities and posted cash collateral to offset any trading losses they incurred. In reality, according to the complaint, most of the fund's capital went to its largest sub-adviser, Kahn, who invested in risky, highly illiquid investments for which the firm performed little to no due diligence, and incurred massive trading losses that far exceeded the cash collateral he had contributed. To conceal the losses from fund auditors, the administrator, and investors, the SEC noted that the defendants used fabricated documents showing that Kahn posted adequate collateral and engaged in a series of sham transactions to inflate the apparent value of the funds' assets and conceal the actual financial condition. The case is being litigated.

The SEC previously charged the firm's President and Chief Compliance Officer, John Hughes, for his role in the fraud (see: https://www.sec.gov/newsroom/press-releases/2023-231).