Investors in 2 O.C. Funds Get Bad News

Regulators offered an unsettling glimpse Tuesday into the finances of an Orange County money manager accused of defrauding 5,200 investors, alleging that James P. Lewis Jr. squandered a large chunk of their money on luxury goods and now has liquid assets worth less than 1% of the $813 million he purportedly owes his clients.

In a court filing seeking the appointment of a receiver to search for more assets, the Securities and Exchange Commission said that Lewis had $2.3 million in cash, $5.8 million in investments in two private companies -- including a software concern that has consistently lost money -- and interests in several Southern California homes.

Lewis, 57, used accounts at his Financial Advisory Consultants firm in Lake Forest to write checks for $14,546 to jeweler Tiffany & Co.; $16,595 to apparel and accessories specialist Gucci; $13,800 to custom suit maker J. Lucas Clothiers, and $17,859 to jeweler Black Starr & Frost, the SEC said in a filing to U.S. District Judge Audrey B. Collins.

In addition, Lewis wrote checks on his personal account for $100,000 to Black Starr & Frost and for $50,000 to Fletcher Jones Motor Cars, a Mercedes-Benz dealer in Newport Beach, noting “deposit Maybach” on the memo line, according to the SEC filings.

The Maybach is a limousine made by DaimlerChrysler.

Collins froze Lewis’ assets Dec. 23, the same week the FBI served a search warrant on his office. The judge also ordered him to account for the $813 million his records showed that he owed investors.

Since that time, “it has become clear that the appointment of a receiver is necessary to identify, locate, recover and distribute funds,” attorneys from the SEC’s Los Angeles office told Collins. Lewis failed to appear at a deposition session, the SEC noted, instead saying through his attorney that he would exercise his 5th Amendment right against self-incrimination.

Neither Lewis nor the attorney who has represented him, Douglas J. Pettibone, returned phone calls seeking comment Tuesday. Pettibone has asked the judge to allow him to withdraw as Lewis’ counsel.

Collins didn’t immediately rule on the SEC’s request to appoint Robb Evans & Associates of Sun Valley as the receiver for Lewis’ operations.

According to SEC filings, Lewis operated a classic Ponzi scheme, using funds from new investors to make some payments to those who had given him money earlier. The SEC said the scam began unraveling last summer, when Lewis, apparently unable to meet withdrawal demands from clients, began telling them their assets had been frozen because of an investigation by the Department of Homeland Security. There was no such probe, the SEC said.

Bank records show that Lewis withdrew about $3 million from his own account at his investment firm about the same time.

Because the operation went on for so long -- Lewis launched his first fund in 1983 -- and the reported returns were so high, much of the $813 million was phony profits, not funds from investors, SEC officials said. They declined to estimate how much had been invested.

“We just haven’t had time to determine that,” said Kelly Bowers, assistant director of the SEC’s regional office in Los Angeles.

In reports to investors attached as court exhibits, Lewis told clients his “income” fund consistently earned annual returns of nearly 20% since the 1980s while his “growth” fund notched returns of 40% a year.

But his administrative assistant said in a sworn statement that the only funds that flowed into the firm were from investors -- not profits from investments. She said Lewis, the only non-clerical employee at his three-person firm, rarely showed up at the office. When he did, she said, he spent his time trading Swiss francs for his own account.

However, the SEC filings Tuesday said Lewis “appears to have used” investor funds to trade in Swiss francs and euros without disclosing that fact and transferred investors’ money into commodities accounts in several names including that of his son, James Lewis III, and a friend, Blakney A. Boggs.

Property records show that in 1999, Lewis and Boggs together bought a house for $1.25 million in Villa Park in north Orange County. Boggs couldn’t be reached for comment. The records also show that Lewis and his estranged wife, Sally, jointly own a golf-course home in Palm Desert and a home in the gated Laguna Niguel community of Bear Brand.

Among those shocked by news of the alleged scam were Sally Lewis, and the couple’s daughter, according to their attorney, Steven L. Krongold of Bienert & Krongold in Capistrano Beach.

Though the FBI is conducting an investigation of Lewis, there is no indication that other family members have been implicated in any criminal wrongdoing, Krongold said. The wife and daughter live in the family’s home in Laguna Niguel, but Lewis hasn’t lived there for several years, the attorney said.

“It’s an unfortunate situation,” Krongold said. “A lot of people have suffered losses, and the family feels bad about that.”