The Commission filed another action against a securities law recidivist, this time centered on a fraudulent trading and investment program. SEC v. Lee, Civil Action No. 14CV0347 (S.D. Cal. Filed Feb. 13, 2014).
James Lee is an unregistered investment adviser. Beginning in late 2008 he solicited investors in California, Colorado, Texas and other states to open online brokerage and margin accounts. The accounts were discretionary, giving him the authority to trade in options. Overall he raised about $25 million from investors.
Mr. Lee assured investors that he was a seasoned trader with substantial experience and advanced degrees. Investors were told that Mr. Lee had a proprietary trading program backed by a research team in China that identified profitable trades. If there were losses, he would share in them up to 50% from his “deep pockets.” In return he would be paid 50% of their profits. Prospective investors were assured that his program had a “stop loss” which would minimize downside risk.
What Mr. Lee failed to tell his investors was that:
In 1997 he was convicted of wire fraud and embezzlement, sentenced to serve 30 months in prison and ordered to pay over $2.8 million in restitution;
In 2008 a default judgment was entered against him in a Commission administrative proceeding involving the sale of billions of unregistered penny stock shares and that a cease and desist order was entered against him based on Securities Act Sections 5(a) and 5(c);
The risks of his option trading program which utilized naked option trading;
The risks of the margin account; and
That he traded in penny stocks despite lacking authorization.
In fact Mr. Lee did not generally split loses with his clients. There was no stop loss mechanism. Indeed, Mr. Lee furnished his clients with account statements that concealed the actual losses and then billed them for profits they did not have.
By early 2012 Mr. Lee had lost over $11 million of investor funds. He had also been paid about $3.3 million in fees. Portions of the funds were siphoned off to shell companies and others. Mr. Lee avoided having funds in his name because of the outstanding restitution order from his criminal conviction.
The Commission’s complaint alleges violations of Exchange Act Section 10(b), Securities Act Sections 17(a)(1) and (2) and Advisers Act Sections 206(1) and (2). The case is in litigation. See Lit. Rel. No. 227927 (Feb. 14, 2014).