UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Plaintiff Securities and Exchange Commission ("SEC") alleges that this securities enforcement action involves two related fraudulent schemes committed by Defendant James Arthur McDonald, Jr. ("McDonald"). All told, McDonald fraudulently raised approximately $5.1 million from about 23 investors and clients, misappropriating more than $1.5 million in investor money to fund his lavish lifestyle and making at least $1.4 million in Ponzi-like payments to investors. First, between May 2019 and October 2021, McDonald, through his control of Index Strategy Advisors, Inc. ("ISA")-an unregistered investment adviser-solicited over $3.6 million from approximately 20 investors for ISA's index hedge fund, the ISA Fund. McDonald told investors that the ISA Fund profitably traded securities, but McDonald used less than half that amount for trading purposes, with long stretches of time where he did not trade at all. McDonald sent ISA Fund investors false account statements showing positive returns from trading and cash held at the end of each month. In addition, McDonald commingled investor funds with funds from his personal bank account, which had itself had been commingled with ISA funds and those of an SEC-registered investment adviser McDonald also controlled, Hercules. Using the commingled funds, McDonald made Ponzi-like payments to ISA Fund investors and payments to clients of Hercules. McDonald also used $1 million of ISA Fund investor monies to fund his extravagant lifestyle, including purchasing luxury vehicles, paying rent on his luxury home, and hundreds of thousands of dollars on personal credit card charges, as well as to pay expenses associated with operating Hercules. Second, between February and October 2021, McDonald offered and sold equity investments in Hercules itself, raising $1.5 million from two types of investors: one non-client group and two existing individual Hercules clients. McDonald falsely represented to the non-client investor group that its funds would be used to expand Hercules's business, but he lied about the firm's financial condition and failed to disclose that he had promised Hercules clients that the firm would repay earlier losses they had incurred as a result of bad trades McDonald had made in the fall of 2020. McDonald also lied to the Hercules client investors telling them that their funds would be spent on Hercules business operations or be used to engage in securities trading. In fact, McDonald commingled their funds with his personal assets, and used the money to make payments to clients and investors and pay personal expenses, including purchasing a Porsche. In furtherance of his scheme, McDonald also induced existing Hercules clients to make, on Hercules's behalf, payments of nearly $1.1 million directly to other clients as partial repayment for their trading losses in exchange for an equity stake in Hercules. As a result of the conduct described in the Complaint, McDonald violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Sections 206(1), 206(2), and 206(4) of the Advisers Act and Rule 206(4)-8 thereunder.

Judgment Rendered

Civil and Administrative Penalty(ies)/Fine(s)

Disgorgement

$3,593,392.01

Monetary Penalty other than Fines

Injunction