SEC Halts $800 Million Investment Fraud

The Securities and Exchange Commission announced the filing of charges to halt a fraudulent scheme in which over 5,200 investor accounts purportedly hold investments of over $813 million through an Orange County, CA, business known as Financial Advisory Consultants (FAC). The SEC's complaint, filed last week in federal district court, names James P. Lewis, Jr., of Laguna Niguel, Calif., who allegedly has sold securities in two funds, known as the Income Fund, Ltd. and the Growth Fund, Ltd., since 1983 through FAC.

Randall Lee, Director of the SEC's Pacific Regional Office, stated, "Our action alleges that the defendant has refused to honor withdrawal requests from over 150 investors based on the false claim that the Department of Homeland Security had frozen the Funds' accounts. What's worse, he continued to solicit new investors and he personally withdrew $3 million from one of the Funds even as he denied other investors the same opportunity - classic indicia of a Ponzi scheme."

The Commission's complaint alleges that for almost 20 years, Lewis, doing business as FAC, sold interests in the Funds. According to the Funds' offering documents, the Income Fund purportedly invests in equipment leasing and insurance premium financing programs and has purportedly realized an average annual return of more than 19% per year since its inception in 1983; and the Growth Fund purportedly buys and sells distressed businesses and has purportedly realized an average annual return of almost 39% per year since its inception in 1987. Lewis has paid about $1.6 million per month in regular withdrawals and about $4 to $7 million per month in other withdrawals. Lewis, FAC, and the Funds are not registered with the Commission.

The Commission's complaint further alleges that since about June 2003, Lewis has not honored many requests to withdraw monies by investors in the Funds. Instead, Lewis has misrepresented to the investors that FAC's and the Funds' accounts had been frozen by the Department of Homeland Security. The Commission's complaint alleges that the Department of Homeland Security has not frozen FAC's and the Funds' accounts, and that Lewis, either directly or indirectly, posed as a Department of Homeland Security official in an attempt to convince FAC administrative personnel that the freeze existed.

The Commission complaint further alleges that while he has failed to honor many withdrawal requests, Lewis has been accepting new investments into the Funds, reinvesting the investors' purported profits in the Funds, soliciting certain investors to make additional large investments in the Funds, and honoring certain investors' withdrawal requests. In addition, about the time that Lewis began to tell Fund investors that FAC's and the Funds' accounts had been frozen by the Department of Homeland Security, Lewis withdrew $3 million from his Income Fund account.

A hearing on the preliminary injunction is scheduled for January 7, 2004.

Update: 1-7-04: The preliminary review showed that James Paul Lewis Jr. had assets of about $2.3 million in cash, $5.8 million in investments in two private companies, and interests in three residences, the SEC said in a court filing.

The filing asks a federal judge to appoint a receiver to search for more assets to repay thousands of investors, many of whom entrusted Lewis' Orange County-based Financial Advisory Consultants with their life savings.

The initial review of Lewis' records, seized by the FBI in a raid last month, shows he used investor funds to trade in foreign currency, buy luxury automobiles and expensive jewelry and other activities, the SEC said.

You may like these other stories...

IRS must take oath on Lerner emails: judgeMackenzie Weinger of Politico reported on Thursday that a federal judge ordered the IRS to explain under oath how it lost emails connected to Lois Lerner, the ex-IRS official at the...
Credit Suisse says pension assets at risk unless court delays sentencingJohn Letzing of the Wall Street Journal reported on Wednesday that Credit Suisse Group AG says its management of billions of dollars in assets for...
The prospect of International Financial Reporting Standards (IFRS) being fully adopted in the United States in the near future are growing less likely, as the Financial Accounting Standards Board (FASB) and the International...

Upcoming CPE Webinars

Jul 16
Hand off work to others with finesse and success. Kristen Rampe, CPA will share how to ensure delegated work is properly handled from start to finish in this content-rich one hour webinar.
Jul 17
This webcast will cover the preparation of the statement of cash flows and focus on accounting and disclosure policies for other important issues described below.
Jul 23
We can’t deny a great divide exists between the expectations and workplace needs of Baby Boomers and Millennials. To create thriving organizational performance, we need to shift the way in which we groom future leaders.
Jul 24
In this presentation Excel expert David Ringstrom, CPA revisits the Excel feature you should be using, but probably aren't. The Table feature offers the ability to both boost the integrity of your spreadsheets, but reduce maintenance as well.