Former CNBC financial analyst James Arthur McDonald faces decades behind bars after defrauding investors out of at least $2.7 million, the U.S. Department of Justice (DOJ) announced Feb. 19.
McDonald, 53, a former resident of Arcadia, Calif., agreed to plead guilty to one count of securities fraud, a felony that carries a statutory maximum sentence of 20 years in federal prison.
“This defendant was entrusted by his clients to care for their money and he violated that trust by using it to enrich himself,” said acting U.S. Attorney Joseph McNally.
At his Washington hideout, officers found a fake Washington, D.C., driver’s license bearing McDonald’s photograph and the name “Brian Thomas,” according to the U.S. Attorney’s Office in Los Angeles.
McDonald was the CEO and chief investment officer of two companies headquartered in Los Angeles—Hercules Investments LLC and Index Strategy Advisors Inc. He also often appeared on the CNBC financial news network.
In late 2020, federal prosecutors say McDonald lost tens of millions of dollars of Hercules client money after adopting a risky short position that effectively bet against the health of the U.S. economy in the aftermath of the U.S. presidential election.
McDonald projected that the COVID-19 pandemic and the election would result in major sell-offs that would cause the stock market to drop, federal prosecutors asserted.
When the market decline did not happen, Hercules clients lost between $30 million and $40 million.
By December 2020, Hercules clients were complaining to company employees about the losses, according to court documents.
He also failed to disclose the massive losses the company previously realized, according to the U.S. Attorney’s Office in Los Angeles.
As part of the campaign to raise capital, McDonald received $675,000 in investment funds from one victim group on March 9, 2021. Prosecutors say he misappropriated most of those funds in various ways, including spending $179,610 at a Porsche dealership and transferring $109,512 to the landlord of a home McDonald was renting in Arcadia.
Prosecutors also claim McDonald defrauded clients of his other firm, Index Strategy Advisors Inc., using less than half of about $3.6 million he raised for trading purposes. Instead, he frequently commingled client funds with funds from his personal bank account, which he used to purchase luxury cars and to pay rent on his home, personal credit card charges, and Hercules operating expenses.
Prosecutors also say he used the funds to make Ponzi-like payments to the company’s clients.
In total, McDonald caused losses of about $2.7 to more than $3 million, according to federal prosecutors.
In April 2024, U.S District Judge Percy Anderson found McDonald and Hercules liable and ordered they pay civil penalties and several million dollars in disgorgement, which is a court-ordered remedy requiring that someone give up ill-gotten gains.
