LOS ANGELES
A former San Gabriel Valley resident who was once a frequent guest on financial television news programs was arrested this weekend, officials stated.
James Arthur McDonald Jr. was a fugitive accused of defrauding investors. He is presumed innocent unless proven guilty.
McDonald Jr., 52, formerly of Arcadia, was arrested Saturday at a residence in Port Orchard, Washington.
McDonald had been considered a fugitive since at least November 2021, when he failed to appear before the United States Securities and Exchange Commission to testify after allegations arose that he had defrauded investors.
Prior to fleeing, McDonald also appeared to have terminated his previous phone and email accounts and told one person that he planned to “vanish,” according to court documents.
Since then, a federal grand jury in Los Angeles in January 2023 returned a seven-count indictment against McDonald.
McDonald is 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.
According to the indictment, McDonald was the CEO and chief investment officer of two companies: Hercules Investments LLC, based in downtown Los Angeles, and Index Strategy Advisors Inc. (ISA), based in Redondo Beach.
He frequently appeared 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 after the U.S. presidential election.
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.
Since McDonald’s compensation for his investment advisory services was primarily based on a percentage of assets under his management—typically 2% of a client’s total assets held by Hercules—the massive losses to Hercules clients significantly decreased the fees McDonald was entitled to collect.
In early 2021, McDonald 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. 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.
As part of the capital raise, McDonald obtained $675,000 in investment funds from one victim group on March 9, 2021. He allegedly misappropriated those funds in various ways, including spending roughly $174,610 of them at a Porsche dealership.
Approximately $109,512 was transferred to the landlord of a home McDonald was renting in Arcadia; and approximately $6,800 was spent on a website that sells designer menswear, according to court documents.
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.
McDonald 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.
If convicted of all charges, McDonald would face a statutory maximum sentence of 20 years in federal prison for each securities fraud and wire fraud count, up to 10 years in federal prison on the monetary transactions derived from unlawful activity count, and up to five years in federal prison on the investment adviser fraud count.
The FBI and IRS Criminal Investigation are investigating this matter.
In September 2022, the SEC filed a civil complaint charging McDonald and Hercules with violations of federal securities law.
On April 21, United States District Judge Percy Anderson found McDonald liable for a total of approximately $3.8 million, which represented his net profits gained because of the alleged conduct.
Assistant U.S. Attorney Alexander B. Schwab of the Corporate and Securities Fraud Strike Force is prosecuting this case.