The reason you have a difficult case is that the other individual does have a right to pursue his own business in direct competition with you. What he may not do is represent himself as your employee while he is doing it.
My information is based on the general legal principles, you may have a cause of action here, and I can tell you that there is a way to go about pursuing it. Speaking with an attorney in person however, gives you the additional perspective of an attorney that can review all of the facts specific to your case and give you not only legal information, but also a case analysis, including a cost/benefit analysis.
The reason I suggested the proposed potential causes of action was that you suggested this other individual's actions, conduct, and representations went beyond a former employee that was simply operating a business in direct competition, and was actually one where he was engaging in fraudulent behavior through misrepresenting his business affiliations and his relationship with you to your mutual customers.
While it may be worthwhile to speak with this attorney again to see if there may be something short of an actual lawsuit to stop certain specific behaviors by this individual (if he is misrepresenting himself, perhaps the attorney may feel a letter advising him of his misconduct is appropriate), but I would suggest relying on local counsel for specific advice.
If you do not have confidence in this attorney's opinion (if you feel he did not give your information sufficient consideration
, or did not consider all of the facts that you provided to him, or for any other reason), I would encourage you to get a second attorney's opinion.