Prosecutors drop fraud charges against ex-Prophecy executive

Federal prosecutors dismissed securities fraud charges against former Prophecy Asset Management executive Jeffrey Spotts, filing the dismissal in federal court in New Jersey on Friday and formally closing the criminal case against him.

The indictment had accused Spotts of participating in a scheme that misled investors about the management and risk profile of hundreds of millions of dollars in hedge fund assets at Prophecy. Prosecutors alleged the firm presented its platform as a network of independent trading managers with strict controls, while concealing that a single person controlled a large portion of the firm’s leveraged positions. Spotts denied any wrongdoing throughout the case.

Court filings show the prosecution’s case was affected by evidence connected to founder Brian Kahn that was classified and could not be disclosed at trial. Sealed proceedings were held before U.S. District Judge Michael Shipp as defense lawyers and prosecutors disputed how the material could be handled. Prosecutors later informed defense counsel that Kahn would not be called as a witness, despite earlier expectations that he would provide testimony in the trial. Kahn and former Prophecy executive John Hughes earlier entered guilty pleas in related matters.

Spotts’s attorney, Lee Vartan, described the dismissal as a “complete vindication,” and said his client had been misled by others at the firm rather than engaging in fraudulent conduct. The government filed the dismissal without a public explanation attached to its request.

The criminal case stemmed from Prophecy’s collapse in 2020. Prosecutors said the firm raised money by promoting a diversified trading platform managed through external sub-advisers while failing to disclose concentration of risk tied to Kahn’s control of leveraged assets. Kahn entered a guilty plea in December to participating in a conspiracy to commit securities fraud and is awaiting sentencing.

The fallout touched other businesses. Court records indicate Kahn ran retail holding company Franchise Group while involved in Prophecy’s trading activities. Franchise Group was taken private in a $2.8 billion transaction in 2023 backed by B. Riley Financial and later filed for bankruptcy in 2024. B. Riley, now operating as BRC Group Holdings, has said its internal review found no evidence it was aware of Kahn’s conduct at Prophecy.

Civil regulatory proceedings remain unresolved. The U.S. Securities and Exchange Commission previously brought civil fraud claims against Spotts, Kahn and Hughes; those proceedings are currently paused.