THE CON: Playing off his reputation as a money manager with a long track record of doubling his clients’ money, James P. Lewis, Jr. pocketed millions in a phony investment fund.
THE DAMAGE: $813 million
THE OUTCOME: The majority of Lewis’ 3,000+ investors lost their life savings. Though he tried to escape, Lewis was found in a budget hotel where he used his own credit card. In 2005, he was sentenced to 20 years in prison.
James P. Lewis, Jr. may have launched his con on a Sunday. After all, he collected the seed money for one of the longest-running Ponzi schemes in U.S. history at church. Leveraging his reputation as a pious and astute money manager, Lewis ran a $813 million scam until state and federal regulators – with the help of con artist turned fraud investigator Barry Minkow – exposed his deception. In 2003, thousands of investors discovered their mistaken trust in Lewis, along with their suddenly empty retirement accounts.
To start, Lewis recruited people from his Mormon church in Southern California. But over time, his con grew legs and expanded well beyond the confines of his community. At the time of his arrest, Financial Advisory Consultants had about 3,300 clients who had invested $311 million on the promise of 40 percent returns. A select group of these investors – the wealthier individuals who were less likely to withdraw their funds from his custody – actually saw returns. Using the methods of a classic Ponzi scheme, Lewis paid them with funds from his more recent investors and advertised their financial gain as bait to attract new victims.
The success of Lewis' earlier clients was effective as a lure for new investors, who he accepted only by referral. He sent out monthly newsletters on his two funds, which supposedly leased medical equipment and bought and sold struggling businesses, respectively. The newsletters were extremely vague, identifying businesses by project number rather than by name. Even Lewis’ two employees knew very little about the funds.
Though his clients were ignorant about Financial Advisory Consultants – including the fact that the company was neither licensed nor regulated – they certainly felt encouraged by what Lewis told them. During the stock bubble of the late 1990s, the promise of 40 percent gains didn't seem unreasonable. Investors trusted Lewis; he had been in business for so many years and had so many satisfied clients.
Many of those clients followed his advice and moved their IRAs, or individual retirement accounts, into his care. Retirement accounts were a critical part of his strategy, according to Barry Minkow, who defrauded thousands with his ZZZZ Best carpet cleaning business and started the Fraud Discovery Institute after his release from prison. Minkow brought documents to state and federal regulators to help build a case against Lewis. “He targeted IRA money because it didn't have to be paid back anytime soon,” Minkow told the Los Angeles Times.
But Lewis knew the game couldn't last forever. Six months before his arrest, he took steps to delay the inevitable collapse of his house of cards. In a bold move, he froze the accounts of 150 investors, claiming it was on orders from the Department of Homeland Security. To convince his small staff, he placed a call to the office from a “Mr. Sanchez” and said that, because of a suspicious wire transfer from the Middle East, the freeze was being imposed. At the same time, he quietly withdrew $3 million from his own account.
In December of 2003, the FBI raided the offices of Financial Advisory Consultants. They found incriminating evidence on computers and paper files – but Lewis himself had disappeared. The manhunt was brief as Lewis left a warm trail for investigators to follow. He checked in to a Comfort Inn in Texas with his own American Express card and, to save a few dollars, used his senior discount card. As investigators cuffed Lewis to bring him back to California, they noticed piles of credit cards, a map of Mexico and a list of potential disguises.
On the books, Lewis appeared to owe his clients $813 million but in reality, most of that was phony profit. The two investment funds were complete shams; Lewis had pocketed millions – and lost more than $20 million trading in foreign currency futures. He pleaded guilty in 2005 and was sentenced to 20 years in federal prison.