The former head of Franchise Group Inc. has been charged with orchestrating a fraud scheme in connection with a hedge fund he helped run, according to Financial Advisor and Bloomberg News.
Brian Kahn was named in a lawsuit filed by the Securities and Exchange Commission in federal court in New Jersey. The SEC’s complaint charges New York-based Prophecy Asset Management LP as well as its CEO and Chief Investment Officer Jeffrey Spotts, and Kahn, its largest sub-adviser. The defendants are accused of a multi-year fraud that concealed hundreds of millions of dollars of losses from investors while bringing in millions in management and incentive fees. Overall, the scheme was reported to have cost investors over $350 million.
The SEC said that Prophecy Asset Management, Kahn and Spotts deceived investors by falsely claiming they were putting their money into an investment fund that minimized the risk of loss, but the fund ended up losing hundreds of millions of dollars.
“The complaint alleges that Prophecy Asset Management and Spotts told investors 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”, the SEC said. “In reality, according to the complaint, most of the funds’ capital went to Kahn, who incurred massive trading losses that far exceeded the cash collateral he had contributed.”
Prophecy Asset Management, Spotts, and the company’s Chief Compliance Officer, John Hughes, allegedly worked with Kahn to deceive the funds’ auditor and administrator, and investors, through fabricated documents and engaging in a series of sham transactions to cover-up the true financial condition of the funds, the lawsuit stated.
When losses in the funds exceeded $350 million by March 2020, Prophecy Asset Management indefinitely suspended redemptions by investors.
The SEC previously filed a fraud charge against Hughes, who pleaded guilty in the case and is reported to be cooperating with prosecutors.
The defendants are charged with violating the antifraud provisions of Sections 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(a) and (c) thereunder, Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8(a)(2) thereunder. The complaint also charges Prophecy Asset Management and Spotts with violating Exchange Act Rule 10b-5(b) and Advisers Act Rule 206(4)-8(a)(1). The complaint seeks permanent injunctions and a civil penalty from all defendants, disgorgement and prejudgment interest from Prophecy Asset Management and Spotts, and officer and director bars as to Spotts and Kahn.
In a parallel action, the U.S. Attorney’s Office for the District of New Jersey announced criminal charges against Spotts.
Kahn has repeatedly insisted he did nothing wrong and that he was among the victims of the firm’s collapse. Attorneys for Kahn and Spotts did not immediately respond to a call requesting comment.
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