The Securities and Exchange Commission today announced the filing of a civil injunctive action against James Arthur McDonald, Jr. and his SEC-registered investment adviser firm, Hercules Investments, LLC in connection with two fraudulent securities offerings. The SEC alleges that McDonald, a former guest commentator on CNBC, raised more than $5.1 million from 23 investors and clients, and misappropriated more than $2.9 million of those funds for personal expenses and Ponzi-like payments to earlier investors. In a parallel action, the United States Attorney's Office for the Central District of California announced criminal charges against McDonald.

The SEC's complaint alleges that McDonald raised over $3.6 million from investors between May 2019 and October 2021 for the stated purpose of trading securities through an investment vehicle called the Index Strategy Advisors Fund, and that McDonald used less than half those funds for trading and did not engage in any trading with the funds for long stretches of time. Instead, the SEC alleges, McDonald misappropriated more than $1 million of the funds for personal expenses, including luxury vehicles and paying rent on his home, and misappropriated more than $2 million of the funds for Ponzi-like payments, payments to his Hercules' investment adviser clients and expenses associated with operating Hercules. The SEC further alleges that, from February 2021 to October 2021, McDonald raised $1.5 million through the sale of equity investments in Hercules's business. According to the complaint, McDonald falsely represented that investor funds would be used to expand Hercules's business, lied about the firm's financial condition, and failed to disclose that he had promised Hercules clients that the firm would repay earlier losses. The SEC alleges that McDonald commingled the investor funds with Hercules assets and his personal assets, and used $440,000 of those funds for personal expenses, including to pay his personal credit card bills.

The SEC's complaint, which was filed in the Central District of California, charges McDonald and Hercules with violating the antifraud provisions of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. The complaint also charges McDonald with violating Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder, which prohibit certain transactions by investment advisers. The complaint seeks permanent injunctions, disgorgement with prejudgment interest, and civil penalties against McDonald and Hercules.

The SEC's investigation was conducted by David S. Brown, Carol Kim, and Matthew O. Koop and was supervised by Marc J. Blau in the Los Angeles Regional Office. Charles Canter will lead the litigation.

The SEC appreciates the assistance of the U.S. Attorney's Office, the Federal Bureau of Investigation, and the Internal Revenue Service-Criminal Investigation Division.