James Paul Lewis Junior
We have looked at a number of Ponzi and Pyramid selling schemes over this series and have noted that there is an inherent design flaw in them. Ponzi schemes are totally reliant upon new members joining the scheme to pay the dividends promised to the earlier investors while pyramid schemes financially reward investors for recruiting new members. However, once the supply of new investors dries up, the whole edifice comes tumbling down.
The remarkable feature of Lewis’ Ponzi scheme is that it defied gravity for so long. It is estimated that it lasted for around 20 years, during which time Lewis had collected around $800 million from his investors – Lewis was one of them. His company was called Financial Advisory Consultants and was based in Lake Forest in Orange County, California. Many of his 5,200 clients were recruited by word of mouth, many through fellow churchgoers and church-based organisations. Initially, the minimum investment was $25,000 but as the fund began to start creaking, this was raised to $100,000.
Lewis span a good story, claiming that one of his funds delivered annual returns of 40% while the other generated a more modest 20%. He was able to sustain such high levels of return, he claimed, by leasing medical equipment, financing purchases of medical insurance, making commercial loans and buying and selling distressed businesses. To add a bit of glitz to the scam, Lewis claimed that his clients included a number of professional athletes and at least one movie star.
In reality, however, Lewis was paying the high levels of dividends from the investments of the newer recruits as well as using some of the funds to finance a lavish lifestyle. Rather like George Best, he spent a lot of money on booze, birds and fast cars. The rest he just squandered. But the money kept coming in, many of his investors putting their life savings into a fund that promised returns that seemed too good to be true. Of course, they were.
The writing was on the wall in 2003 when Lewis was unable to meet dividend payments. Investors became suspicious but he placated them and bought some time by claiming that the Department of Homeland Security had frozen the funds. This, naturally, was bunkum and when there was still no sign of the promised dividends, the FBI were invited to investigate. Lewis did then what any self-respecting fraudster does when the net tightens around him – he fled.
An arrest warrant was issued on January 14th 2004 and after a narrow escape in Tallahassee, Lewis was arrested in Houston. The investigations showed the extent of Lewis’ scam. Instead of the $814 million in clients’ assets he was supposed to have had, his company’s bank accounts held just $2.3m. Even at the time that his funds were allegedly frozen, Lewis helped himself to $3million and amongst the assets the FBI seized were five cars including two Mercedes and a BMW. A letter dating to 2001 showed that Lewis had speculated on high-risk currency trading – naturally, Lewis lost $6.5 million on that occasion.
On trial in 2006 – Lewis received 30 years and was ordered to repay $156 million – Judge Carney called the scheme a “crime against humanity” because many of its victims were elderly and had lost their life savings. Only $11 million was ever recovered.
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