SEC Pursues $22M Ponzi Scheme Aimed at Retirement Funds
August 21, 2006

The SEC has filed an emergency action in a California District Court to halt an alleged scam that raised more than $22 million by targeting retirement funds.

The Commission charged Jon W. James, 29, of Manhattan Beach, CA, and a handful of companies that James controls with soliciting investors through free dinner meetings and retirement planning seminars.

James his companies allegedly defrauded more than 99 investors in Southern California by telling them their IRA funds would be used for real estate investments with returns as high as 24%. Instead, the regulator claims that James pocketed at least $1.4 million of investor funds and used other investors’ assets to pay returns to existing investors, in a classic Ponzi scheme. The defendants made fraudulent sales as recently as late July, according to the Commission.

In response to the SEC’s charges, the Court has issued an order freezing the companies’ assets and appointing a temporary receiver. The Commission is seeking preliminary and permanent injunctions, the return of ill-gotten gains with prejudgment interest, and civil monetary penalties.

“In this case, the Commission sought emergency relief to protect investors from being defrauded of their hard-earned retirement funds,” stated Randall R. Lee, Director of the Commission’s Pacific Regional Office in Los Angles. “As set forth in the Commission’s complaint, the defendants in this case pitched free dinner and retirement planning seminars to potential investors. At these ‘free’ seminars, they promised unrealistically high rates of return in order to entice investors to transfer their IRA savings to the defendants for investment in purported businesses, which were largely non-existent.”

Several companies controlled by James named as defendants include John W. James & Associates, J.W. James Borrowing Entity, LLC, J.W. James Investment Group Fund One, LLC, The James Company Fund I, LLC, The James Company Borrowing Entity, Virtual Cash Flow Corporation, the Cloaking Device, Inc, and the J.W. James Acquisitions, LLC.

According to the Commission, the firms have been soliciting investors since at least January 2004. In doing so, the companies told investors that their retirement money would be used by JWJA to engage in lucrative real estate deals with extremely high returns. They made roughly $14 million in purported interest and principal payments to investors throughout 2004 and 2005 using new investors’ assets. None of the companies had actually purchased any real estate or real estate assets.

James’ companies only began purchasing real estate in early 2006, after an inquiry conducted by the California Department of Corporations. In early 2006, James finally admitted to the DOC that his firms had failed to disclose that it was paying investors with other investors’ funds.

To lure investors James offered free dinners and one-on-one meetings, in which he told potential investors that his investment strategies could help investors retire “in just seven short years” by investing their IRAs in a supposedly “booming real estate market” and “to produce double-digit returns,” according to the Commission.

James’ companies also provided investors with promissory notes that falsely stated they were secured by monies owed to the firms. Some of the notes claimed to be secured by an “investment involving the purchase and discounting of real estate acquisitions.” In reality, the minimal real estate purchases made were never adequate to secure the investors’ promissory notes, stated the regulator.

“This case reaffirms the Commission’s commitment to aggressively investigate and take prompt action against frauds targeting Americans’ retirement funds. This is precisely the kind of rapid response envisioned at the SEC’s first-ever Seniors Summit last month, where the SEC joined with state regulators and others to examine how to best protect older Americans from investment fraud,” stated Linda Chatman Thomsen, Director of the SEC’s Enforcement Division. “Today’s action demonstrates yet again that the Commission will not tolerate frauds that prey upon investors’ life savings.”

A hearing will be held on August 24 to determine whether a preliminary injunction should be issued against the defendants. The hearing will also determine if a permanent receiver will be appointed.

The regulator has recently pursued a similar real estate scams targeting older investors. In late July, the SEC charged several New York-based individuals with scamming roughly 275 elderly investors out of at least $15 million over an eight-year period. The defendants allegedly issued promissory notes in real estate companies they owned and grossly misrepresented to investors the value of those companies.

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