SEC charges former CNBC guest analyst with $3 million fraud

The Securities and Exchange Commission has filed a civil injunctive action against James Arthur McDonald Jr. and his registered investment advisory firm, Los Angeles-based Hercules Investments, in connection with two fraudulent securities offerings.

The SEC alleges that McDonald, a former guest commentator on CNBC, raised more than $5.1 million from 23 investors and clients, and misappropriated more than $2.9 million of those funds for personal expenses and Ponzi-like payments to earlier investors.

In a parallel action, the U.S. Attorney’s Office for the Central District of California has filed criminal fraud charges against McDonald, who faces up to 20 years imprisonment if convicted and who is believed to be in hiding, according to a statement from the office.

The U.S. Attorney's Office traces McDonald's problems back to late 2020, when he lost "tens of millions of Hercules client money" by taking a short position that bet the U.S. economy would suffer in the wake of the presidential election.

The SEC's complaint alleges that although McDonald raised more than $3.6 million from investors between May 2019 and October 2021 for the stated purpose of trading securities through an investment vehicle called the Index Strategy Advisors Fund, he used less than half those funds for trading and did not engage in any trading with the funds for long stretches of time. Instead, the SEC alleges, McDonald misappropriated more than $1 million of the funds for personal expenses, including luxury vehicles and paying rent on his home, and misappropriated more than $2 million of the funds for Ponzi-like payments, payments to his Hercules' investment adviser clients and expenses associated with operating Hercules.

The SEC further alleges that from February 2021 to October 2021, McDonald raised $1.5 million through the sale of equity investments in Hercules' business. According to the complaint, McDonald falsely represented that investors' funds would be used to expand Hercules' business, lied about the firm's financial condition, and failed to disclose that he had promised Hercules clients that the firm would repay earlier losses. The SEC alleges that McDonald commingled the investor funds with Hercules assets and his personal assets, and used $440,000 of those funds for personal expenses, including to pay his personal credit card bills.

McDonald last appeared on CNBC in July of 2021.

“As soon as we found out he was under investigation, we no longer allowed him on our air,” a CNBC spokesperson wrote in an email.

[More: State regulators see decline in enforcement actions]