Soured Milk Culture Firms Hit by New Suit

A national soured-milk-culture-growing operation doing business in Orange County has been hit with another in a string of lawsuits aimed at shutting it down.

Last Wednesday, Oregon joined California, Florida and Kansas in filing lawsuits against the companies involved for allegedly selling unregistered securities. Oregon Atty. Gen. Dave Frohnmayer called the Nevada culture-growing operation the “most sophisticated pyramid scheme of the 1980s.” Pyramid operators generally use new money from investors to pay off debts owed earlier investors.

‘Misleading and Fradulent’

“Only once in a decade do we see illegal investment schemes grow to this proportion, pulling with them thousands of citizens who are victimized by misleading and fraudulent operations,” said Frohnmayer. There are at least 2,000 culture growers in Oregon.

Activator Supply Co. of Pahrump, Nev., and Culture Farms Inc. of Lawrence, Kan., have been prohibited from doing business in Oregon under a temporary restraining order issued June 4 by Multnomah County Circuit Court Judge Charles Crookham. A hearing has been set for June 14.

Despite the numerous lawsuits, there have been no reports of actual investor losses.

Company officials said more than 15,000 U.S. investors have paid millions of dollars to promoters for the right to grow the fermented milk-and-cheese substance. The dried, refined culture is allegedly used in a line of women’s cosmetics manufactured by an Irvine company called the House of Cleopatra’s Secret Inc.

In recent weeks, as states have taken steps to close down the operation, payments to culture growers have been running four to five weeks late and there is concern among growers that the supply of culture is exceeding the demand. A spokesman for the Orange-based California Assn. of Growers recently confirmed that payments are late but blamed the delay on an overworked Culture Farms staff.

Kits Sold to Growers

Growers receive between $6 and $10 per batch of dried culture. Activator Supply Co. sells the activator kits to growers who sell the completed culture back to Culture Farms. Activator Supply recently moved from Las Vegas to Pahrump, a new community 60 miles west of Las Vegas, after being denied a business license by Las Vegas authorities.

“If this (culture) is a security, boy it would be a big surprise to me,” said Activator Supply Co. President Roland Nocera last week in commenting on the allegation of selling unregistered securities. Nocera said he is cooperating with state authorities because “I don’t want to violate the law, I want to stay in operation.”

Because Nocera’s company sells activator kits to investors and purchases refined culture from Culture Farms to sell to new growers, Oregon and California have accused the firms of operating an unlawful pyramid scheme. A grand jury in Topeka, Kan., is also conducting an investigation, according to Nocera.

Irvine Man Named

Four individuals, including Paul Stemm of Irvine, were named in the Oregon lawsuit. Stemm represents Ariate N.V., an investment group based in Curacao, Netherlands Antilles. “They (the states) will knock me out of this suit, like they’ve knocked me out of all the other suits,” said Stemm in an interview Thursday. Stemm said he is not a principal and has no involvement in any of the companies named in the lawsuit. He said he represented Ariate when it licensed Activator Supply and Culture Farms to handle U.S. culture sales.

In the last two years, South Africans invested about $180 million in a similar soured milk culture developed by a South African farmer before the government stepped in last November and closed down the operation. The U.S. culture promoters have denied any connection between their business and the South Africa operation. However, state investigators say several individuals, including Paul Stemm, have been involved in both promotions.