James Arthur McDonald Jr., an investor and financial analyst who frequently appeared on CNBC, was sentenced to five years in prison for defrauding investors in a multimillion-dollar scheme, the United States Attorney’s Office said on Monday.
McDonald, 53, a former San Gabriel Valley resident, was the CEO and chief investment officer of two Los Angeles-based companies: Hercules Investments LLC and Index Strategy Advisors Inc.
In late 2020, McDonald adopted a “risky short position” betting against the U.S. economy following the presidential election, with the idea that the combination of the COVID-19 pandemic and the election would trigger a major sell-off in the stock market, according to the Justice Department. However, when the expected market drop did not happen, Hercules’ clients lost between $30 million and $40 million.
McDonald “solicited millions of dollars’ worth of funds from investors” for the purposes of raising capital for Hercules at the start of 2021 after clients complained to the firm’s employees about their losses. However, in doing so, McDonald “misrepresented how the funds would be used” and failed to disclose the firm’s massive losses.
According to the Justice Department, McDonald obtained $675,000 from “one victim group” and then misappropriated most of the money including spending $174,610 at a Porsche dealership and transferring an additional $109,512 to the landlord of a home he was renting in Arcadia.
McDonald also defrauded clients at Index Strategy Advisors, his other firm, said the Justice Department, using less than half of $3.6 million he raised for trading purposes on personal and other expenditures.
McDonald commingled clients’ funds with his personal bank account and used the money to buy luxury cars, pay his rent, make credit card payments, pay off Hercules operating expenses and “to make Ponzi-like payments” to Index Strategy clients — including paying some of those clients using funds from other clients.
Prosecutors claimed that McDonald caused his victims more than $3 million in losses.
“To his victims, [McDonald] seemed to embody the American Dream,” prosecutors argued in a sentencing memorandum. “But looks can be deceiving, and as [McDonald’s] victims learned, their trust had been betrayed.”
In November 2021, McDonald failed to appear before the Securities and Exchange Commission to testify about the allegations he had defrauded investors, and remained a fugitive until last June when he was found at a residence in Port Orchard, Wash.
At the time of his arrest, law enforcement found a fake Washington, D.C., driver’s license with his photograph and the name “Brian Thomas.”
In April 2024, a U.S. District judge found McDonald and Hercules liable for violating federal securities law and ordered them to pay millions in disgorgement and civil penalties.
McDonald pleaded guilty to one count of securities fraud in February.
He will be ordered to pay restitution in this case before a United States district judge at a later date.
