Filed: September 29, 2025 | Source: SEC Complaint, U.S. District Court, District of New Jersey
Prophecy’s Fake Stocks, Forged Signatures, and $350 Million in Stolen Futures
While Prophecy Asset Management told investors they were generating steady, safe, positive returns every single month for years, the fund’s actual cumulative losses quietly exceeded $400 million — losses the firm covered up with invented stock certificates, forged signatures, and money they borrowed from the very investors they were robbing.
The Setup: A “Safe” Fund That Was Anything But
Prophecy Asset Management presented itself as a sophisticated, low-risk hedge fund with a clever protective mechanism called the “first-loss” model. The pitch was simple and reassuring: Prophecy would distribute investor capital among a diverse group of sub-advisers, each required to post their own cash as collateral — typically 10% of their trading allocation — to absorb any losses they generated. If a sub-adviser’s losses hit 50% of their cash deposit, PAM claimed it would cut off their trading immediately.
The fund’s marketing materials described a real-time monitoring system, a diversified pool of traders running “unique” strategies, and investments concentrated in highly liquid securities that could be sold within a single business day. PAM, Spotts, and Hughes distributed monthly fact sheets, due diligence questionnaires, and audited financials that all repeated this story. Investors put in over $500 million (roughly what it would cost to fully fund free school lunches for 250,000 children for an entire year) on the strength of these promises.
Every core element of that pitch was fabricated.
78% of Everything, Hidden Behind a Number
PAM told investors Prophecy allocated capital to “dozens” of sub-advisers. The December 2018 Portfolio Breakdown Report listed 33 managers — labeled only as “Manager 1” through “Manager 33” — as proof of diversification. What investors could not know: six of those 33 “managers” were all the same person, Brian Kahn, operating through different entities he controlled. Those six slots combined represented approximately 78% of Prophecy’s more than $1 billion in leveraged trading capital.
Kahn was losing that money at a catastrophic rate. By September 2018, his trading losses exceeded his posted cash collateral by $55 million (enough to pay a year’s rent for roughly 1,500 families). By November 2019, that deficit had ballooned to $216 million (more than the average American earns in 4,300 lifetimes). By March 2020, Kahn’s losses exceeded his collateral by $328 million (enough to wipe out the savings of thousands of households who invested their retirement money in good faith).
PAM, Spotts, and Hughes received monthly reports showing exactly how bad it was. They discussed it in person. They knew. And then they sent investors account statements showing positive returns.
Reported Assets vs. Hidden Kahn Losses (Jan 2018 – Jan 2020)
Source: SEC Complaint. AUM figures are Prophecy-reported; loss figures are cumulative undisclosed Kahn trading losses as documented by the SEC. Losses continued rising to over $400M in Feb–Mar 2020 (not shown).
The Collateral That Wasn’t There
From 10% to 0.05%: The Safety Net That Evaporated
The entire “first-loss” system depended on sub-advisers keeping 10% of their trading allocation deposited as cash collateral. Prophecy’s own due diligence materials called this deposit “the primary downside risk protection for the fund.” PAM told investors that no sub-adviser had ever exhausted that protection. Both statements were lies, and they had been lies from the very beginning.
The first time a sub-adviser exhausted their cash collateral was January 2014, when a trader lost nearly $3 million (enough to pay off student loans for about 100 average borrowers) of investor capital beyond what their collateral covered. Rather than disclose that loss, PAM, Spotts, and Hughes engineered a series of sham transactions to hide it. That playbook became the firm’s primary fraud tool for the next six years.
By January 2019, Prophecy’s total cash deposit balance had fallen to a mere 0.77% of the reported gross market value of its assets. Six months later, in July 2019, it dropped to 0.05%. The promised 10% buffer — the “primary downside risk protection” — had essentially ceased to exist. Spotts, that same month, emailed a prospective investor calling Prophecy “a pure first-loss strategy, with all allocations backstopped by collateral deposits.”
The May 2019 Lie: $36 Million That Didn’t Exist
On May 2, 2019, PAM sent Prophecy’s largest investor a document showing Kahn maintained a deposit balance of more than $36 million (more than what 700 average American households earn in a year). The document was false. On that same date, the actual bank account holding collateral for all of Prophecy’s sub-advisers combined contained less than $10 million. Internal records showed Kahn’s actual deficit on that day was approximately $130 million (enough to fund a mid-sized city’s entire public library system for a decade).
Kahn’s Cash Collateral Deficit: Selected Dates
Source: SEC Complaint paragraphs 61 and 68. By March 2020, Kahn’s trading losses exceeded deposited capital by $328 million. The entire promised collateral system was fiction.
How They Hid It: Sham Stocks, Forged Signatures, and Round-Trip Cash
The Phantom Buddy’s Newco Preferred Stock
During Prophecy’s 2018 audit, the auditor identified Kahn’s massive cash deposit deficit and asked Hughes to explain it. The answer Spotts, Hughes, and Kahn invented was a fabricated securities instrument. Kahn created a document called the “Buddy’s Newco LLC Series A Preferred Stock Agreement,” which purported to show that Prophecy owned $75 million to $150 million (enough to buy a small hospital system) worth of preferred shares in a company Kahn controlled. The document was backdated to January 1, 2018.
On June 1, 2019, Hughes emailed Kahn directing him to “finalize the class A share document and get certificate for same.” Kahn responded by confirming the backdated date and noting the transaction “would become a credit to the fund and an asset on your balance sheet year end 2018.” Two days later, Kahn delivered two stock certificates: one for 75 shares valued at $75 million, one for 150 shares valued at $150 million. The SEC’s complaint states plainly: the shares “never existed.”
When Prophecy’s administrator separately asked for documentation of Kahn’s collateral in June 2019 — noting that 58% of Prophecy’s net asset value was a receivable owed by Kahn — Hughes provided the second Buddy’s certificate, now dated January 1, 2019. The same phantom shares, re-dated, handed to two different oversight parties to answer two different audits. The entire operation was a sham “created by Kahn, Spotts, and Hughes.”
Forging a 13-Year-Old’s Signature
The Broad Reach fraud featured an act that sits in a category of its own. Broad Reach Capital LP, one of Prophecy’s investments, turned out to be another Ponzi-like scheme. When Prophecy tried to redeem its approximately $24 million investment in late 2018, Broad Reach could only return $6.5 million, leaving a $17.5 million (what 437 average Americans earn in a full year) shortfall on the books. Kahn stepped in to cover the gap by routing money through AGS Enterprises to make it look like the receivable had been collected.
To paper over the transaction, the team needed a document assigning Prophecy’s Broad Reach partnership interest to Kahn’s AGS Enterprises. There was one problem: Prophecy’s limited partnership agreement with Broad Reach did not permit unilateral assignment. So Spotts and Hughes altered that agreement before handing it to auditors. And Kahn needed a signature on the assignment document from someone at AGS Enterprises that wasn’t obviously himself. His solution: he forged the signature of his then 13-year-old son, using his son’s first and middle name but omitting the last name to obscure the connection.
That document — bearing a child’s forged name — was submitted to Prophecy’s auditors as a legitimate business transaction. Spotts then emailed the auditor claiming Prophecy had been “fully redeemed” from Broad Reach by April 2019. The money had actually come from Kahn, cycling investor capital in a circle to erase a loss that never got fixed.
The $36 Million Round-Trip: Borrowing From Peter to Pay Peter
The Vintage Capital loan was another masterclass in fraud mechanics. In late 2018, Prophecy loaned Kahn’s Vintage Capital Management $36 million (enough to send 1,200 students to a public university for four years) — while Kahn already had a cash collateral deficit exceeding $50 million. The loan matured. Kahn didn’t repay it. During the 2018 audit, Kahn told Hughes he could temporarily pay it back but needed the money immediately returned. PAM agreed.
On April 25, 2019, Kahn received $25 million from a third party into a Vintage account, then immediately wired that $25 million to Prophecy. Later that day, another $2.5 million. The next morning, $8.5 million more. Total: $36 million delivered to Prophecy. Then, on the morning of April 26, Prophecy wired the entire $36 million straight back to Kahn — $17 million to “Vintage Tributum LP” and $19 million to “Vintage Panther LP” — documented as new investment “allocations” that did not exist. When the auditor asked Hughes where the loan repayment money came from, Hughes stated in writing — copying Spotts — that no additional loans were exchanged with Kahn entities to collect the $36 million. That too was false.
The $194 Million Ghost Fund
By the end of 2019, Kahn’s losses had grown so large that the receivable he owed Prophecy was approaching 53% of Prophecy’s entire reported assets under management. The auditors and administrator were asking harder questions about the phantom collateral backing it. The solution: swap the receivable for a “new investment.” Kahn created a limited partnership called Samjor LP, with Prophecy as the sole limited partner. Kahn was supposed to capitalize it by contributing $194 million (more than the annual GDP of some small nations) worth of shares in a publicly traded company where he served as CEO.
He never contributed a single share. Samjor LP had zero assets from the moment it was created. Prophecy’s administrator asked Hughes for a statement confirming Samjor’s value. Hughes passed the request to Kahn. Kahn fabricated a Samjor account statement showing Prophecy’s investment was worth exactly $194 million as of December 31, 2019 and January 31, 2020. An empty shell with a fake balance sheet, submitted to satisfy an audit that was supposed to protect investors.
The Non-Financial Ledger: What a $350 Million Lie Actually Costs
The SEC complaint measures this fraud in dollar figures. But the people who trusted Prophecy with their savings did not experience it as a dollar figure. They experienced it as a locked account, a letter, a phone call that didn’t come. On March 31, 2020 — as the COVID-19 pandemic was reshaping the world and financial stability felt more urgent than it had in decades — Spotts sent investors a letter disclosing that Prophecy’s auditor had resigned, withdrawn its opinion, and that all redemptions were suspended indefinitely. People who had expected to access their money could no longer do so. No timeline for return. No recovery mechanism. Just: suspended.
This fraud ran for at least six years. From 2014 through March 2020, investors received monthly account statements showing positive returns that were manufactured lies. They made life decisions based on those statements. Retirement timelines. Children’s education funds. Decisions about whether to leave jobs, buy homes, support aging parents. The fund’s own marketing positioned it as a low-risk, steady-return vehicle — the kind of conservative, boring hedge fund you could trust to protect what you’d already earned. That positioning was precision-crafted to attract exactly the kind of investor who could not afford to lose: people who needed safety, not yield.
The collusion with auditors and administrators is what makes this particularly suffocating for the people caught inside it. Investors reasonably relied on the fact that Prophecy had audited financial statements. The 2017 audited financials, provided to at least some investors, specifically stated that sub-advisers were contractually required to post cash deposits to absorb their trading losses. When an auditor reviews and signs off on a fund, investors understand that as a check — a second set of eyes not on the payroll of the people running the fund. Spotts, Hughes, and Kahn systematically dismantled that protection by feeding fabricated documents to auditors, coaching Kahn on how to respond to auditor questions, and altering legal agreements before submitting them. They corrupted every layer of oversight that existed to protect the people whose money they were managing.
And the Special Opportunities fund added another layer of betrayal. Investors in Special Opportunities were told their capital was being placed into proven trading strategies selected for their track records and liquidity. Instead, of the fund’s $47.5 million in assets, nearly $18 million was loaned back to Prophecy — a fund already imploding under the weight of Kahn’s losses — and another $19 million went to entities controlled by Kahn. Special Opportunities investors were unknowingly throwing fresh money into a sinking ship, some of which was immediately used by Kahn to cover tracks on other fraudulent transactions, including the Broad Reach cover-up. They funded their own deception.
Legal Receipts: What the Documents Actually Say
“No portfolio managers had a severe enough decline in the allocations to exhaust their deposit and impair the fund.” — Jeffrey Spotts, email to investors, October 28, 2018. At the time of writing, Kahn’s trading losses exceeded his cash collateral by $55 million. The SEC alleges Spotts knew or was reckless in not knowing this statement was false.
“The fund is a pure first-loss strategy, with all allocations backstopped by collateral deposits.” — Jeffrey Spotts, email to a prospective investor, February 2020. At the time of writing, Kahn’s collateral deficit was approaching $200 million. The SEC describes this as a knowingly or recklessly false statement.
“Confirm date of issuance for you should be January 2018. This would become a credit to the fund and an asset on your balance sheet year end 2018 . . . .” — Brian Kahn, email to John Hughes, June 1, 2019, in reference to the backdated Buddy’s Newco Preferred Stock Agreement. The SEC states the shares described in this document never existed.
“More than 58% of Prophecy’s $350 million net asset value was in the form of a $204 million receivable due from Kahn and should be classified as illiquid.” — Prophecy’s administrator, email dated June 18, 2019. This communication directly preceded the production of the fabricated Buddy’s Newco stock certificates to the administrator.
“We are not in that fund” and “We are not impaired by this event.” — Jeffrey Spotts, email to an investor on August 27, 2019, after the SEC charged Broad Reach Capital’s operator Brenda Smith with securities fraud. Spotts knew Prophecy had invested approximately $24 million in Broad Reach and had not fully recovered it. The SEC alleges Spotts knew or was reckless in not knowing these representations were false.
“Kahn forged the signature of his then 13 year-old son on the document, using his son’s first and middle name but omitting his last name; and Spotts and Hughes altered the limited partnership agreement before sending it to Prophecy’s auditors.” — SEC Complaint, paragraph 132. This describes the fabrication of the Broad Reach assignment document used to conceal the fund’s failure to recover a $17.5 million investment.
Societal Impact: Who Pays When Rich Men Lie
Economic Inequality: The Architecture of Investor Fraud Targets the Trusting
Hedge fund fraud is often framed as a wealthy-person problem — a story about sophisticated investors who should have known better. That framing is wrong and it is used deliberately to suppress outrage. The Prophecy scheme was specifically structured to attract capital from investors who prioritized safety. The “first-loss” model, the diversification pitch, the monthly positive-return statements — all of these were precision-engineered signals designed to say: this is the boring, responsible choice. PAM marketed steady mid-to-high single-digit returns “uncorrelated to market conditions.” That language speaks directly to people who cannot afford volatility: retirees, pension-adjacent fund allocators, family offices managing inherited wealth that represents the life’s work of a previous generation.
PAM and Spotts collected more than $15 million (enough to fund a full four-year college education for 500 students) in management and incentive fees during the period they were actively lying to investors. Those fees were calculated on reported asset values that were inflated by fabricated collateral, phantom stock certificates, and round-trip transactions. The fraud generated fee income in direct proportion to how effectively it hid the truth. Every dollar of fee collected was extracted from a pool of investor capital that was simultaneously being misrepresented, mismanaged, and looted. The people who paid those fees were paying Spotts and Hughes to lie to them.
The March 2020 gate — the suspension of all redemptions — landed at the worst possible moment for investors who may have needed liquidity to navigate the economic shock of the pandemic. When Prophecy’s auditor resigned and redemptions were frozen on March 31, 2020, the global economy was already in freefall. Investors who had counted on the fund’s promised liquidity — the marketing materials claimed positions could be liquidated within one business day — discovered they could not access their money at the exact moment when access to money mattered most. The timing of that disclosure, after years of deception, compounded the harm in ways that go far beyond the dollar figure of $350 million.
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
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