Deep down, Michael O'Hara knew the huge profits at Financial Advisory Consultants Inc. "were just too good to be true."
So when his 70th birthday rolled around in 2000, and he had to start drawing down his individual retirement accounts, he hedged his bets by taking out more money than required by law.
O'Hara, a prosperous insurance agent from Placentia, regarded the $106,000 he had deposited in the 1990s in an FAC investment fund as "Vegas money." And with the fund reporting annual returns of nearly 40%, O'Hara seemed to have hit the jackpot: Late last year, even after he had withdrawn $123,000, his FAC account balance was $700,000.
Then FAC crapped out. Two days before Christmas, the Securities and Exchange Commission charged the Lake Forest company and its owner, James P. Lewis Jr., with operating an elaborate, 20-year fraud.
An FBI raid of FAC's office on El Toro Road turned up assets worth a bit more than 1% of the $813.9 million that Lewis' clients supposedly had accumulated. Lewis, known to his family, friends and clients as an investment genius, was nowhere to be found. As of late Friday, he was being sought by the FBI.
Among the cruel twists of the FAC debacle is that so many investors, like O'Hara, were gambling with their retirement funds. Many lost virtually everything. According to SEC filings and attorneys involved in the case, the victims include Lewis' computer technician, who mortgaged his house to invest with FAC, and the mother of Lewis' live-in companion, who handed over her entire $250,000 in retirement savings.
FAC's books listed 1,340 IRAs and Keough retirement accounts, according to analysis by Robb Evans & Associates, the court-appointed receiver in the case. That indicates that as many as about 40% of the 3,290 active investors lost at least some of their retirement savings.
Barry Minkow, the San Diego private investigator who uncovered the alleged fraud and alerted authorities, said attracting and retaining IRA money was an integral part of Lewis' modus operandi.
IRAs, tax-sheltered accounts set up to encourage retirement savings, are designed to keep money locked up for years, with heavy penalties for savers who withdraw funds before they are 59 1/2. Investors aren't required to take any funds out until they reach 70 1/2.
The 57-year-old Lewis "targeted IRA money because it didn't have to be paid back anytime soon," said Minkow, a former teen tycoon who spent seven years in prison for defrauding investors and banks in the infamous ZZZZ Best carpet-cleaning scam in the 1980s.
Lewis would ask prospects how their IRAs were performing, then suggest they move the accounts to FAC, "and he'd pay the transfer fees," Minkow said.
In material sent to investors, Lewis wrote that "many of our clients work all their lives to build up a base of assets they can depend on for retirement.
"But savings alone aren't sufficient to last through a retirement which could extend to 20 to 30 years or longer," he wrote. "Investing for retirement is a long-term endeavor which can be enhanced by investing in our funds."
Lewis had operated his investment firm since 1983, never registering himself or his funds with state or federal authorities. His financial reports said FAC's Growth Fund made its nearly 39% annual profit by investing in, and then reselling, distressed companies, though Lewis never told investors the names of the companies, describing them only by project numbers.
FAC's supposedly safer Income Fund reported more than 19% annual earnings from equipment leasing and insurance premium financing, also vaguely described in written material.
Accepting new clients only on referral, Lewis appears to have benefited indirectly from the stock bubble of the late '90s, which gave investors inflated expectations about risk and return.
"It was not like this was the only thing that was soaring in the late '90s," investor O'Hara said. "You could pick up the paper and see all these high-tech companies going crazy, rising 300% or 500% a year. So here was this guy making 40% -- so what?"
In another twist, Lewis also seems to have benefited from the bust that followed, which played havoc with stock portfolios, and from the decline in interest rates, which battered holders of conservative certificates of deposit.
Temecula real-estate agent Charles N. Woolstenhulme, one of the last investors to give Lewis money, told the SEC he had been hearing about FAC since 1999 or 2000 from a friend at church who consistently reported big profits.
Woolstenhulme, 45, asked for investor material last October and decided to transfer $100,000 from a Fidelity IRA to FAC based on the firm's claims about its fat returns.
"I was also comforted to learn from friends at my church that FAC had been in business for approximately 20 years," Woolstenhulme said in a declaration attached to the SEC's request to have a judge freeze Lewis' assets.