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Ponzi scheme: Faithful drawn into scam

Utah LDS among 5,200 victims of large Ponzi web

Published: Monday, Aug. 3 2015 6:01 p.m. MDT

SACRAMENTO — More than 5,200 clients across America — including some in Utah and some who are members of The Church of Jesus Christ of Latter-day Saints — 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, although professional athletes and at least one movie actor are said to be investors.
As their own retirement accounts sagged with the stock market, they marveled at Lewis' reports of consistently returning upward of 40 percent from one fund and 20 percent from another, year in and year out for two decades.
They scrambled to give him money, any caution or doubts pushed aside as they saw their fellow investors periodically withdraw as much as $250,000.
Their financial futures 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 the "fraudulent scheme" involved $813 million from more than 5,200 investors.
The California Corporations Department has identified investors in Utah, Idaho, Oregon, Colorado, Georgia and California, according to an FBI affidavit.
Many of Lewis' investors learned of Financial Advisory Consultants through friends at church and were eager to get in on a semisecret investment opportunity that appeared open to only a lucky few. Many considered Lewis a friend, some attending weddings and funerals with him.
Clients say Lewis is a member of the LDS Church, and his first clients came from that community. But over the years, his investors came from churches of many other denominations as well.
Most said they accepted the word of their fellow churchgoers and were reassured when Lewis periodically paid out as much as a quarter-million dollars to mostly wealthy investors who rarely withdrew the bulk of their contributions.
"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, who now works as an anti-fraud investigator for San Diego-based Fraud Discovery Institute, provided state and federal regulators with documents questioning Lewis' legitimacy, also prompting an investigation and story by The Associated Press earlier this month.
The FBI's search warrant and the SEC's civil complaint listed the same warning signs as the AP's story earlier this month: 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 false excuse that millions of dollars in investments have been frozen by the U.S. Department of Homeland Security.
Yet investor after investor told the AP that they missed or ignored the warning signs in what the FBI and other scam experts said appears to be a classic case of affinity fraud.
"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, Calif. "This is devastating, devastating news."
Parsa was vacationing in Mexico when he heard that the more than $3 million invested by his family was in jeopardy.
"We always likened him to a poor man's Warren Buffett," said Kevin Haugh, 47, of Woodbridge, Va. 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 Lewis began spreading what federal investigators call the bogus Homeland Security freeze story and delaying withdrawals requested by more than 150 investors last summer, he 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 records 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 not only has a home in Laguna Niguel, but a vacation home in Palm Desert and a membership in the nearby Indian Ridge Country Club where the initiation fee goes for $95,000 and the monthly fee is $785.
He owns at least one Mercedes Benz automobile 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.
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. When one client demanded more information, Lewis told him to take his business elsewhere, authorities said.
Yet Robert FitzPatrick, the co-author of "False Profits" and president of Pyramid Scheme Alert, said Financial Advisory Consultants had all the earmarks of "a classic Ponzi scheme."
They include the promise of financial returns that are too good to be true; a total lack of details or accounting on how the company is making its money; and word of mouth recruiting among friends and associates.
"The only transactions occurring are later transactions paying for earlier transactions, with the whole thing run through one individual," FitzPatrick said. "This company doesn't even have to show the cash. All they're doing is sending out a sheet of paper saying, 'Hey, you're worth all this money.' "
Even allowing investors to periodically withdraw a portion of their money is a routine part of a confidence scheme, FitzPatrick said.
One San Diego investor, who asked to remain anonymous, said he'd invested about $500,000 — most of his net worth — but had been slowly withdrawing several hundred thousand dollars to care for his 4-year-old autistic son.
With the firm's collapse, "I'll have to pretty much sell my house, sell everything," he said. "My life's pretty much devastated."
"It's not a very merry Christmas," sighed another investor who asked to remain anonymous. He fears he's out more than $1 million.

Copyright 2015, Deseret News Publishing Company