Barred investment advisor, former CNBC pundit sentenced to five years for fraud

A former CNBC financial commentator and Los Angeles-based advisor was sentenced to five years in federal prison after admitting to defrauding clients and investors out of millions of dollars through two advisory firms he controlled, according to federal authorities.

James Arthur McDonald Jr., 53, was sentenced by United States District Judge Dale S. Fischer after pleading guilty to one count of securities fraud on April 7.

According to a statement from the Department of Justice, McDonald, who previously appeared as an analyst on financial television, served as CEO and chief investment officer of Hercules Investments and Index Strategy Advisors, both headquartered in Los Angeles.

Restitution for victims will be determined at a later hearing, the DOJ said .

According to prosecutors, McDonald lost tens of millions of dollars in client assets at Hercules Investments in late 2020 after making a high-risk bet against the US economy, anticipating a market downturn following the presidential election and the ongoing Covid-19 pandemic at the time. When the predicted selloff failed to materialize, clients lost between $30 million and $40 million.

Complaints from clients began surfacing by December 2020, but McDonald concealed the losses while soliciting new investments in early 2021.

The DOJ said McDonald misrepresented the purpose of a capital raise for Hercules, failing to disclose the substantial losses already incurred. Instead of using the $675,000 raised from one investor group as promised, he spent $174,610 at a Porsche dealership and transferred more than $100,000 to cover rent on a luxury home.

Prosecutors allege that McDonald also misused funds from Index Strategy Advisors, another firm he owned, commingling client money with his personal accounts and using it for personal expenses, including luxury vehicles, credit card payments, and rent, as well as making Ponzi-like payments to earlier investors.

ISA was registered with the SEC from 2010 to  2019, and Hercules operated from 2019 to 2021, according to McDonald's investment adviser record with the SEC. 

In total, authorities estimate that McDonald’s actions resulted in more than $3 million in losses to his victims.

A separate 2022 charge from the SEC offers a different perspective into the case, detailing how McDonald raised approximately $5.1 million from about 23 investors and clients, misappropriating more than $1.5 million for personal use and making at least $1.4 million in Ponzi-like payments.

The SEC alleged that McDonald sent false account statements to investors and misrepresented the financial health of his firms, while commingling funds and using investor money to pay for personal and business expenses .

McDonald’s fraudulent activities continued even after ISA lost its registration as an investment adviser and was rendered defunct by Texas authorities. The SEC complaint states that he continued to solicit investments and provide clients with documents falsely representing that the firm was properly registered.

One section of the complaint describes how McDonald addressed one non-client investor in 2021, acknowledging in an email that his "handling of [the investor’s] funds was not professional" and “that more full disclosure of our need for the funds should have been given." In the same email, McDonald sent a promissory note saying he would repay the investor funds owed in six months.

After failing to appear before the SEC in November 2021, McDonald became a fugitive. He remained at large until his arrest in June last year at a residence in Port Orchard, Washington.

Authorities discovered a fake driver’s license with McDonald’s photograph and a different name, "Brian Thomas," at the time of his arrest. He has been in custody since then.

In a sentencing memorandum, prosecutors wrote: “To his victims, [McDonald] seemed to embody the American Dream. But looks can be deceiving, and as [McDonald’s] victims learned, their trust had been betrayed.”