SEC Says Prophecy Used Fake Stock and Sham Loans to Hide Massive $350M Losses.

More than $350 million in investor monies vanished. Not in a volatile market crash like one might expect, but within a system meticulously designed to hide its own catastrophic failures.

A U.S. Securities and Exchange Commission legal complaint filed on September 29, 2025, alleges that Prophecy Asset Management (PAM) and its principals orchestrated a multi-year fraud by promoting a sophisticated, safe-sounding investment model while secretly gambling (losing) hundreds of millions.

The firm collected over $15 million in fees for overseeing a portfolio it was allegedly driving into the ground. This here was the deliberate construction of an alternate financial reality, one that duped investors, auditors, and administrators until the entire structure spontaneously imploded.

How the System Was Rigged

The SEC details a consistent pattern of deception where safeguards were not merely ignored, but systematically dismantled and replaced with fabricated substitutes.

At the core of the operation was a betrayal of the firm’s foundational promise: a “first-loss” model where independent traders had to post their own cash as collateral to absorb any losses, supposedly making it impossible for the fund itself to lose money. The reality was a hollowed-out system designed for concealment.

• The Promise of Diversification vs. The Reality of Concentration: Prophecy told investors their capital was spread across dozens of diverse sub-advisers to minimize risk. In truth, the vast majority of assets were allocated to a single sub-adviser, Brian Kahn, who incurred colossal losses. This concentration was hidden in reports sent to investors, where Kahn’s various entities were anonymized as separate “managers” to create the illusion of a diversified platform.
• The Myth of “Cash Collateral”: The entire safety net was the promise that sub-advisers would post cash collateral—typically 10% of their allocation—to cover any trading losses. Yet, as Kahn’s losses mounted into the hundreds of millions, his cash collateral deficit ballooned, at one point reaching $328 million. By July 2019, the fund’s entire cash deposit balance was a mere 0.05% of its assets, a fatal deviation from its advertised structure.
• Manufacturing Money with “Round-Trip” Transactions: To plug the gaping collateral holes, Prophecy didn’t require Kahn to add his own money; it simply gave him investor funds to send back. In one instance, Prophecy “loaned” $11 million of investor money to a shell entity Kahn controlled. That money was then routed through another Kahn entity and immediately sent back to Prophecy, where it was recorded as a fresh cash collateral contribution from Kahn. The fund was effectively using its own capital to create the illusion of being protected.
• Fabricating Assets Out of Thin Air: When auditors began questioning the massive receivable owed by Kahn, the defendants allegedly invented assets to secure it. Kahn created sham documents for $125 million in preferred stock in a company he controlled, “Buddy’s Newco LLC,” and backdated them to 2018 to satisfy the audit. The shares never existed. This worthless, fabricated collateral was presented to both auditors and the fund’s administrator as a legitimate asset.
• Lying Directly About Performance: While Kahn’s losses were secretly accumulating (reaching over $270 million by January 2020) PAM and its principal Jeffrey Spotts continued to provide investors with statements and “fact sheets” showing positive returns every single month. Weeks after Kahn’s losses had already exhausted his collateral by $55 million, Spotts assured investors in an email that no manager had come close to impairing the fund.

A System of Failed Safeguards

The Economic Fallout

The primary consequence was the outright destruction of over $350 million in capital that investors believed was secured by a risk-averse strategy. The evil corporation raised over half a billion dollars based on this premise. The scheme not only wiped out existing investments but also pulled in new money under false pretenses, as Prophecy continued to solicit capital while hiding its insolvency. When the fraud finally unraveled in March 2020, PAM indefinitely suspended all redemptions, trapping the remaining investor capital in a worthless fund.

The Erosion of Trust

The fraud was ultimately an attack on the financial system’s gatekeepers. By repeatedly providing falsified documents, sham transaction records, and fabricated assets to auditors and administrators, the defendants demonstrated how easily the mechanisms of oversight can be manipulated from the inside. The creation of non-existent stock certificates and the use of round-trip loans were designed specifically to deceive the very parties tasked with ensuring financial accuracy, undermining trust in the auditing process itself.

The Bottom Line: Accountability Beyond a Fine

The SEC has charged Prophecy Asset Management, Jeffrey Spotts, and Brian Kahn with multiple violations of federal securities laws, seeking the return of ill-gotten gains, civil penalties, and a ban on Spotts and Kahn from serving as officers or directors of public companies.

Another co-conspirator, John Hughes, has already pled guilty to criminal charges for his role.

But the case exposes a deeper systemic vulnerability.

This was not a momentary lapse but a years-long, calculated effort to operate a shadow financial system hidden behind a veneer of legitimacy. The wrongdoers here exploited the deference given to internal company records, turning the fund’s entire structure into a tool for deception.

Meaningful accountability demands a critical examination of how financial gatekeepers can verify assets that are claimed to exist but don’t, and how to stop investor capital from being used in a circular scheme to mask its own destruction.

Without it, the blueprint for this $350 million disaster remains available for the next operator to follow.

The SEC has a press release on this scandal if you want to visit their website: https://www.sec.gov/enforcement-litigation/litigation-releases/lr-26414

The Department of Justice also has a press release: https://www.justice.gov/usao-nj/pr/co-founder-and-ceo-investment-fund-charged-294-million-securities-fraud-conspiracy