2 Firms Barred From Selling Securities

The California state attorney general’s office Monday won a court order barring the further sale of unregistered securities by two out-of-state companies involved in a national, multimillion-dollar soured milk culture-growing operation. The suit alleges that the companies operated a Ponzi scheme, using money from new investors to pay off earlier ones.

The suit, filed in San Diego Superior Court, contends that Activator Supply, the Nevada-based seller of the culture-growing kits, and Culture Farms, the Lawrence, Kan., company that buys cultures from growers, were selling unregistered securities and operating an endless-chain marketing program, among other violations.

A similar soured milk culture-growing investment scheme was shut down by South African officials last fall after investors there lost about $120 million.

Thousands of growers in California and at least 20 states have invested an estimated total of $5 million in the culture-growing operation, according to state investigators.

Many of the California investors were from Orange County, where local law enforcement authorities have been investigating the operation.

Promoters say the culture is a key ingredient in a line of women’s cosmetics manufactured by the House of Cleopatra’s Secret in Palm Springs. California followed Kansas, Oregon and Florida in taking action against the companies involved.

Without admitting liability or guilt, the companies agreed Monday to revise their California sales program and sales literature after the court granted a preliminary restraining order barring further sale of the kits.

M. James Lorenz, a San Diego attorney for the companies, said in a phone interview that company officials believe that changes in the sales literature will allow them to continue operating in California.

Deputy Atty. Gen. Al Shelden said it appears that the companies were operating a classic Ponzi scheme by using “money from the new folks to pay off the old folks.”

Growers pay between $395 and $3,950 to participate. Culture Farms recently sent letters to growers warning that the $6 to $10 price it now pays for individual cultures may be reduced because supply is exceeding demand.

The company also suggested that growers seek other markets for their cultures.

In 1977, Activator Supply President Roland Nocera pleaded guilty to securities fraud charges in connection with Holiday Magic, a defunct San Rafael, Calif.-based cosmetic company. Nocera was president of that company from 1970 to 1973.