2/18/2014 7:34:00 AM,
Philip A. Janquart
SAN DIEGO (CN) - A recidivist investment criminal took $3.3 million in fees from suckers while losing another $11 million for them, the SEC claims in court.
James Y. Lee, 58, of La Jolla, took $25 million from victims of his latest scam, "portraying himself as a highly successful financial industry expert while failing to disclose a prior criminal conviction for embezzlement and a more recent (Securities and Exchange] Commission cease-and-desist order for his role in unlawful penny stock offerings," the SEC says in its 19-page lawsuit.
Lee was an unregistered investment adviser and CFO of a mortgage company that went belly-up in 1993, the SEC claims in the complaint.
In 2008, he began soliciting investors in several states to open brokerage accounts and allow him to trade stock options for them through online companies such as Scottrade and Charles Schwab, which are not parties to the complaint.
He lured them by presenting himself as a "highly successful financial industry expert" with his 20 years of experience, including on the floor of the New York Stock Exchange, claimed he was a CPA and that he held a law degree, on top of an MBA and Ph.D., the SEC says.
Actually, he was already a criminal, "no more interested in sharing in his clients' eventual and substantial losses than he was in paying millions of dollars owed to the federal government for his past illegal conduct," the complaint states.
In 1997 he was convicted of wire fraud and embezzlement related to his former employer's business activities and pension plan. He was sentenced to 30 months in prison and ordered to pay more than $2.8 million in restitution, according to the complaint.
In 2008, the commissioned imposed default sanctions on Lee for making unregistered offerings of billions of shares in penny stock companies. He was ordered to cease and desist, and to disgorge more than $2.8 million, plus prejudgment interest. "he has made only minimal payments toward this obligation," the SEC says.
Thus chastened - but not much -Lee began his most recent scam that same year, inflating his experience and misleading clients about their investment risks, the SEC claims.
"Despite Lee's claims about the safety of client investments, all of Lee's clients faced margin calls and suffered substantial losses in their accounts," the complaint states. "By early 2012, Lee's clients collectively had lost over $11 million (out of approximately $25 million invested) and additionally paid over $3.3 million in fees,"
The money he took from clients included fees charged for false performance.
"In his zeal to profit at his clients' expense, Lee charged fees to three of his investment advisory clients based on false account performance for February 2011 and concealed from the clients that they had actually incurred net realized losses that month, such that no fees were due," according to the complaint.
"Lee instructed clients to pay his management fees to various shell companies owned by his girlfriend, son, and two longtime associates," the complaint states. "These companies, in turn, disbursed a portion of the funds to Lee and to the friends and family that served as his de facto intermediaries."
Lee continued dealing in penny stocks even though his clients agreed only to buy and sell trade options, the SEC says. In 2009, he advised a client to invest $15,000 in Axia Group through a "convertible promissory note." though company had only $700 in its bank account, according to the SEC.
That money too was divvied up and transferred to shell companies and cronies, according to the complaint.
Relief defendants include Lee's 37-year-old girlfriend Larissa O. Ettore of La Jolla; his son Clayton K. Lee,34, of Alameda; his "longtime associate" Lolita Gatchalian, 55, of Albany, Calif.; and the shell corporations ELX International Inc., Advance Century Corp., Ultra International Inc. and SOT Group Inc.
Lee funneled several million dollars through these defendants, the SEC claims.
When the SEC summoned him "before the commission staff for investigative testimony, he invoked his Fifth Amendment right against self-incrimination and refused to answer any questions about his background, his representations to investors, his trading strategy" and other conduct.
The SEC seeks disgorgement, restitution, and injunction and penalties for violations of the Exchange Act, the Securities Act and Advisors Act, and unjust enrichment.
And it wants him told to stop doing this and not to do it again.