A California-based consultant and former frequent CNBC analyst is in custody after eluding law enforcement for more than two years, according to the Justice Department.
James Arthur McDonald was arrested over the weekend in Port Orchard, Wash., about 15 miles outside Seattle. He made an initial court appearance in Tacoma, Wash., and is expected to be transferred to Los Angeles to face federal charges in the coming weeks.
In January 2023, a Los Angeles grand jury indicted him on one count of securities and wire fraud and three counts of defrauding investment advisers. If convicted, he faces up to 20 years in prison.
McDonald's victims collectively lost between $30 and $40 million, and he has been on the run since late 2021according to the DD.
McDonald was CEO and chief investment officer for two companies: Los Angeles-based Hercules Investments and Redondo Beach-based Index Strategy Advisors. He also appeared frequently as a market analyst on CNBC, including “Fast Money” and “The Exchange.” (In 2020, Hercules Investments won a WealthManagement.com industry award in the Alternative Asset Management category.)
In late 2020, McDonald's began shorting the US economy, betting that the market would sour after the COVID-19 pandemic and that year's presidential election. But the market continued its growth in 2021, and Hercules customers lost millions in the process, according to the DOJ.
By the end of 2020, Hercules clients were seeing losses on their accounts, and since McDonald tied its fees to assets under management, those losses hurt McDonald's bottom line. In 2021, McDonald went to Hercules investors, claiming he wanted to raise capital for the firm and open a mutual fund under the ticker “NFLHX” (McDonald was a big football fan, according to the DOJ).
Instead, he used the funds he raised to pay the losses the firm's clients suffered—losses that threatened NFLHX's success. Additionally, any litigation arising from the losses will have to be disclosed to the funding investors. McDonald also allegedly used some of the funds for his own purposes; he collected about $675,000 from a group of victims in March 2021 and spent about $174,610 of that money on a Porsche dealership, $109,512 to rent a house in Arcadia, Calif., and $6,800 on designer men's clothing, according to Department of Justice.
Neither McDonald nor the attorneys representing him could be reached for comment.
Additionally, over several years, McDonald collected $3.6 million through his other company, Index Strategy Advisors, but he spent more than $1 million of that money on his own uses and more than $2 million on payments to clients. of Hercules and the firm's expenses, according to an SEC complaint filed in 2021.
McDonald continued to send ISA customers false account statements, but the SEC was closing in.
The commission contacted McDonald's lawyers to schedule an interview in October 2021 and eventually called it. But McDonald allegedly told his former romantic partner that he wasn't staying and planned to “disappear,” according to FBI agent Robert Chowthi.
In a criminal complaint, Chowthi said McDonald gave his ex-partner (called “DJ” in the complaint) a laptop and cellphone to secretly communicate with the adviser, as well as a thumb machine that indicated which clients of Hercules owed money. One morning in the fall of 2021, DJ woke up to find McDonald gone, according to Chowthi, with his phone and email accounts disabled.
According to the DOJ, a federal judge found the adviser liable for more than $3.8 million in a parallel SEC action.