The Securities and Exchange Commission charged Orange County investment manager James P. Lewis Jr. with fraud Tuesday, alleging he falsely told clients who were trying to withdraw money that their accounts had been frozen by the Department of Homeland Security.
Securities regulators said the alleged fraud involved two funds managed by Lewis' Financial Advisory Consultants.
The company purportedly manages $813 million in 5,200 investor accounts, the SEC said, although it was unclear how much actually was invested with Lewis.
Also Tuesday, U.S. District Judge Audrey B. Collins issued a temporary order freezing Lewis' assets and ordered him to account for his investors' money.
"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," Randall Lee, director of the SEC's regional office in Los Angeles, said in a statement. "What's worse, [Lewis] 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."
Investigators don't know how much is left in the accounts. "That's something we're obviously trying to determine," SEC spokeswoman Sandra J. Harris said. "We don't know precisely how much was invested here."
The $813-million figure was gleaned from Lewis' own records, Harris said, and includes money invested by clients and supposed investment profits, minus any withdrawals.
The SEC described Lewis' Lake Forest-based operation as a Ponzi scheme, in which earlier investors are paid with cash raised from new investors, rather than with legitimate investment earnings.
The FBI raided Lewis' offices Monday but hasn't filed any related charges.
Lewis' attorney, Douglas Pettibone, couldn't be reached for comment, and calls to Lewis' office Tuesday afternoon went unanswered.
The whereabouts of Lewis, a resident of Laguna Niguel, were unknown. "The SEC is in the process of trying to serve Mr. Lewis with the complaint and the order," said Kelly Bowers, a spokesman for the SEC in Los Angeles.
The SEC's civil complaint alleges that Lewis sold interests in two funds, the Income Fund and the Growth Fund.
According to fund documents, the Income Fund invests in equipment leasing and insurance-premium financing programs and claims an average annual return of 19% since its start in 1983. The Growth Fund, described as buying and selling distressed businesses, claims an average return of 39% since its start in 1987.
Since about June, however, Lewis "has not honored many requests" by investors to withdraw their money, the SEC said.
Around that time, the SEC said, Lewis informed investors that the Department of Homeland Security, the federal government's anti-terrorism agency, had frozen the funds after the firm received a wire transfer from the Middle East.
About a month ago, Financial Advisory Consultants received a call from "a Mr. Sanchez," supposedly from the Department of Homeland Security, but the call had been placed from Lewis' cellphone, according to the SEC.
In fact, the Department of Homeland Security never froze the accounts, the SEC said. Lewis "either directly or indirectly posed as a Department of Homeland Security official in an attempt to convince [fund] administrative personnel that the freeze existed."
Lewis also reputedly told investors that the Internal Revenue Service was complicating their attempts to withdraw money because of supposed tax issues.
In addition to a cease-and-desist order against Lewis and an accounting of his operation, the SEC complaint seeks the return of any ill-gotten gains.
In one twist, state and federal regulators reportedly were aided in their investigation by Barry Minkow, the whiz kid carpet-cleaning entrepreneur in the 1980s who landed in jail for stock fraud. Minkow has emerged as a fraud investigator in San Diego.
"We uncovered the entire fraud and brought it to law enforcement two months ago," Minkow said Tuesday.
SEC officials declined to comment on what role Minkow may have had in their inquiry.
Associated Press was used in compiling this report.