After running from the law for nearly three years, a former CNBC financial analyst charged with defrauding investors was arrested over the weekend, California prosecutors said.
James Arthur McDonald Jr. was arrested Saturday at a residence in Port Orchard, Washington. He is expected to be transferred to Los Angeles in the coming weeks to face federal charges.
If convicted, the 52-year-old is looking to spend several decades in prison.
Mr. McDonald disappeared in November 2021, when he failed to show up to testify before the United States Securities and Exchange Commission (SEC), which had summoned him over allegations of defrauding investors.
A federal investigation revealed that Mr. McDonald appeared to have terminated his previous phone and email accounts prior to fleeing. He also told one person that he planned to “vanish,” according to court documents.
In September 2022, the SEC filed a complaint accusing the fugitive of misappropriating funds of dozens of clients and investors through his investment firm, and a federal arrest warrant was issued.
In January last year, a Los Angeles federal grand jury officially charged Mr. McDonald 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.
In April, U.S. District Judge Percy Anderson found Mr. McDonald liable for a total of approximately $3.8 million—the estimated net profits gained from his alleged illegal conduct.
According to the Department of Justice, Mr. McDonald could be looking at “a statutory maximum sentence of 20 years in federal prison for each securities fraud and wire fraud count,” as well as “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.”
Wrong Bet and a Fraudulent Fix
Mr. 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 was a regular guest analyst on the CNBC financial television news network.
According to the SEC charges, Mr. McDonald raised more than $5.1 million from 23 investors and clients between May 2019 and October 2021 and misappropriated more than $2.9 million of those funds for personal expenses on the one hand—such as rent, designer clothes, and spending $175,000 at a Porsche dealer—and “Ponzi-like payments” to earlier investors.
Halfway through 2020, Mr. McDonald, via his firm Hercules, began promoting a trading strategy that he claimed was designed to take advantage of anticipated market volatility surrounding the 2020 presidential election and the ongoing effects of the COVID pandemic. The markets, however, decided to respond differently—with disastrous results for Hercules and its clients.
By the first week of December, Hercules’ strategy had yielded $30 to $40 million in losses, according to court documents. As many as half of Hercules’ 105 clients saw their account balances shrink to half, or less than half their initial value.
Mr. McDonald then devised a “loss recovery” plan. Between February and October 2021, Mr. McDonald raised approximately $1.5 million from the offer and sale of limited liability units in Hercules, allegedly by misrepresenting how the funds would be used and failing to disclose the disastrous losses previously sustained and that several Hercules clients had threatened to sue or complain to regulators.
Mr. McDonald also allegedly lied to his clients about ISA, his other company, being a registered investment adviser, even though he had canceled its state-registered status of his own accord in May 2019.
Both the FBI and IRS Criminal Investigation are investigating the case.