Compliance August 11, 2006

Feds Break Up Retirement Fraud Scheme

August 11, 2005 (PLANSPONSOR.com) - Federal regulators have charged a California man with running a $22 million scheme designed to bilk investors out of their IRA accounts.
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A news release from the US Securities and Exchange Commission (SEC) named Jon James, 29, of Manhattan Beach, California, and several companies he controls, including Jon W. James & Associates (JWJA), based in El Segundo, California

According to the SEC’s complaint, James solicited investors through JWJA with direct mail invitations to free dinner seminars, since at least January 2004, that focused on retirement planning. As alleged in the complaint, the invitations included statements, such as “Retirement Secrets of the Rich: What your Accountant and Stockbroker don’t want you to know.”

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The SEC news release said the invitations and seminars claimed JWJA would help investors retire “in just seven short years” by investing their IRA funds “to take advantage of the booming real estate market” and “to produce double-digit returns.”

James fraudulently told investors that their funds would be used for profitable real estate transactions that would provide returns, which at times were represented to be as high as 24%, the SEC statement said. The complaint alleged the defendants offered and sold promissory notes and, later, interests in limited liability companies.

According to the SEC, throughout 2004 and 2005, defendants did not purchase any real estate or real estate related assets from which to pay investor returns. Also, the complaint alleges that the defendants misrepresented to investors that their investments would be secured by real property, or by funds owed to JWJA from real estate transactions. The complaint also alleges defendants fraudulently failed to disclose that they used new investor money to pay returns to previous investors.

The SEC said that US District Judge Florence-Marie Cooper of the US District Court for the Central District of California, appointed a temporary receiver over the companies controlled by James and also froze his assets.

Randall Lee, director of the SEC’s Pacific Regional Office in Los Angeles, said in the news release, “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.”

In addition to James and JWJA, also named in the SEC’s complaint are:

  • J.W. James Borrowing Entity
  • J.W. James Investment Group Fund One
  • The James Company Fund I
  • The James Company Borrowing Entity
  • Virtual Cash Flow Corporation
  • The Cloaking Device
  • J.W. James Acquisitions.
Compliance August 10, 2006

Court: USERRA Doesn't Preclude Workplace Arbitration

August 10, 2006 (PLANSPONSOR.com) - A federal appellate court ruled employer arbitration policies may be used to settle employee complaints including potential violations of laws barring discrimination against military service members.
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In doing so, the 5 th US Circuit Court of Appeals threw out a decision favoring plaintiff Michael Garrett by a federal judge in the Northern District of Texas. The lower court judge agreed with Garrett that his former employer, Circuit City , had violated his rights under the Uniformed Services Employment and Reemployment Rights Act (USERRA) as a member of the Marine Reserves. Garrett alleged the violation occurred when the electronics retailer insisted his dispute go to arbitration rather than to litigate it in court.

According to a the appellate ruling written by Chief Circuit Judge Edith Jones, disposing of the dispute between Garrett and the company via arbitration does not run afoul of USERRA rights granted to service members by Congress. “It is not evident from the statutory language that Congress intended to preclude arbitration by simply granting the possibility of a federal judicial forum,” wrote Jones in the ruling. “Congress took no specific steps in USERRA, beyond creating and protecting substantive rights, which could preclude arbitration.”

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Jones said Garrett joined Circuit City at a Texas location in 1994. In 1995 , the chain adopted a nationwide policy for dispute resolution­. Garrett signed his acknowledgment of receiving the notice and did not opt out of the policy during the 30-day period when it was possible.

According to the decision, by the December 2002 and March 2003 period, when the US was ramping up for the second war inIraq, Garrett was managing a Dallas regional service center. He claimed his supervisors, knowing his reserve status, began criticizing and disciplining him.In March 2003, Garrett was fired, which he attributes solely to his status as a Marine Reserve Officer.

Judges also noted that federal employees must take their complaints of USERRA violations to the Merit Systems Protection Board rather than to court, indicating that alternative methods are permissible under the law. Garrett must arbitrate his wrongful termination claim.

Finally, the appellate judges rebuffed Garrett’s argument that granting his appeal was the most patriotic thing for the court to do.

“Garrett finally argues that the important public policy interest behind USERRA, embodying the protection of soldiers and thus the enhancement of American security, necessitates denying the request for arbitration,” wrote Jones. “Although we agree that the interests USERRA protects are important, it is wrong to infer that the service members’ substantive rights are not fairly and adequately protected by arbitration proceedings under the FAA. USERRA’s purposes can be fully realized through arbitration.”

The case is Garrett v. Circuit City Stores, U.S. Court of Appeals for the 5th Circuit, No. 04-11360 (5/11/06). The appellate ruling is  here .

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