Colossal Ponzi scheme alleged

SACRAMENTO — More than 5,200 clients across the country trusted James Paul Lewis Jr. with their life savings, pouring hundreds of millions of dollars into his Southern California investment funds on the word of a few friends.

Many heard about Financial Advisory Consultants through fellow churchgoers. Lewis told clients that investors included professional athletes and at least one movie actor.

They marveled at Lewis’ consistent reports, over two decades, of annual returns nearing 40 percent from one fund and 20 percent from another. Periodically they saw fellow investors cash in as much as $250,000.

It all came crashing down this week when a federal judge froze the company’s assets and the FBI carted away documents and computers from Lewis’ three-room Orange County office suite.

No charges have been filed, but the FBI alleges Lewis was operating a "Ponzi scheme," in which early investors are paid with money from later investors. The federal Securities and Exchange Commission says his accounts totaled $813 million.

"It’s a house of cards," said Barry Minkow, himself once imprisoned for seven years for defrauding investors through his ZZZZ Best carpet cleaning company. "It will go down as the longest-running Ponzi scheme in history, and the mutual fund that didn’t exist."

Minkow now works as an anti-fraud investigator for San Diego-based Fraud Discovery Institute. He provided state and federal regulators with documents questioning Lewis’ legitimacy.

The FBI’s search warrant and the SEC’s civil complaint listed the same warning signs: the 57-year-old Lewis was investing tens of millions of dollars for clients and claiming extraordinary financial returns without being licensed or regulated as required.

Moreover, the El Toro-based firm has never provided clients with any details on how it invests their money. Since June, Lewis has been delaying withdrawal requests with the excuse that millions of dollars in investments have been frozen by the U.S. Department of Homeland Security. There was no such freeze, investigators say.

Investors said that, guided by trust, they missed the warning signs.

"He’s a family man, he’s a religious man, he goes to church every Sunday. He sent us pictures of his grandchildren," said Tom Parsa of Irvine. "This is devastating, devastating news."

Parsa was vacationing in Mexico when he learned his family’s investment of more than $3 million was in jeopardy.

Kevin Haugh, 47, of Woodbridge, Va., said investors thought of Lewis as "a poor man’s Warren Buffett."

He sent Lewis $30,000 three weeks ago to add to the roughly $2 million three generations of his family thought they had squirreled away. "I was planning on retiring in a few years. That obviously isn’t going to happen."

Lewis has not responded to multiple telephone messages left by the AP over three weeks, nor to letters sent to him by registered mail and overnight delivery. His attorney, Douglas J. Pettibone, said Lewis won’t comment, but intends to fight the allegations.

At the same time he began delaying withdrawals last summer, Lewis raised the minimum investment from $25,000 to $100,000 for his growth fund and from $10,000 to $25,000 for his income fund.

Though Lewis has blocked most withdrawals from his funds since June, he withdrew $3 million from his own account on July 1, SEC court filings show. He "continues to live well," his administrative assistant, Mary Lopez, told federal investigators last week.

Lopez, who has worked with Lewis since 1997, told investigators that Lewis has a home in Laguna Niguel, a vacation home in Palm Desert and a membership in the nearby Indian Ridge Country Club, where the initiation fee goes for $95,000. He owns at least one Mercedes Benz and is awaiting delivery of another, Lopez said in a sworn statement to the SEC.

The firm operated with no more than three employees, and Lewis himself rarely showed up at the office after the first year she worked there. When Lewis did show up, he spent his time trading on his computer. Lopez said Lewis told her he was trading Swiss francs on his own time and account.

The only funds that flowed into the firm were from investors themselves, she said.

In six years, Lopez saw no business activity or any indication of the lucrative projects Lewis wrote about in his monthly newsletters. Clients accepted the newsletters and Lewis’ monthly statements as the only evidence they needed that investments were soaring in good times and bad.