James Arthur McDonald Jr., a former investment advisor and CNBC commentator, is arrested after over two years on the run for an alleged multimillion-dollar fraud.
The Justice Department indicts him on seven charges, including wire fraud and investment advisor fraud, in January 2023. McDonald has been considered a fugitive since November 2021 when he failed to testify about the fraud allegations before the SEC.
Before fleeing, McDonald shuts down his phone and email accounts, telling an acquaintance he intends to “vanish.” His troubles start in late 2020 when he takes a risky short position following the presidential election, betting that U.S. markets will decline sharply. This downturn does not occur, and clients of McDonald’s advisory firm, Los Angeles-based Hercules Investments, lose between $30 million and $40 million.
The Justice Department states that McDonald typically charges clients an advisory fee of 2% of their assets under management, with the collapse of the short strategy significantly decreasing his income. In early 2021, McDonald solicits millions of dollars from investors for a capital raise for his firm, including the launch of a new mutual fund. However, he misrepresents how he plans to use these funds and fails to disclose the millions of dollars in trading losses his firm sustained and the related risk of litigation.
McDonald also controls another entity, Index Strategy Advisors, used to solicit $3.6 million in investments between May 2019 and October 2021. He promises investors their funds will be used for buying securities but only uses less than half for trading and misappropriates over $3 million for personal expenses and making Ponzi-like payments to Hercules investors who suffer losses from the short strategy.
Authorities claim McDonald commingles funds raised through the alleged Hercules capitalization scam with his personal assets, spending about $174,610 at a Porsche dealership and using other money for high-end clothing and rent payments. In April, a judge in the civil case against McDonald finds him liable for around $3.8 million, representing his net profits from the fraudulent conduct.
In the criminal case, McDonald faces 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. If convicted on all counts, he faces a maximum prison sentence of 75 years.
