Bankruptcy Filed by Company in Bacteria-Growing Venture : Beleaguered Investment Operation Collapses

A nationwide culture-growing investment operation that attracted an estimated $63 million from 27,000 people, including thousands in California, has collapsed in the wake of on-going state and federal investigations.

Culture Farms Inc. of Lawrence, Kan., one of three companies promoting the investment, sought protection of the federal court in Topeka, Kan., late last week under Chapter 11 of the U.S. bankruptcy code. The voluntary filing came just hours after a group of 10 culture growers filed a lawsuit in Kansas City, Kan., asking a judge to declare Culture Farms bankrupt and to liquidate its assets.

In recent months, law enforcement officials in California, Arizona, Florida, Oregon and Washington have all taken action in an attempt to shut down the culture-growing investment operation.

Investors, who were recruited after attending sales presentations, were supposed to be growing bacterial cultures for a line of women’s cosmetics. They received powdered culture, mixed it with milk and left it to ferment for a week. The results were then dried and sent to Culture Farms, working with House of Cleopatra cosmetics.

However, less than 1% of the thousands of pounds of cultures grown were used to make House of Cleopatra’s Secret cosmetics, according to Kansas Securities Commissioner John Wurth. According to Kansas securities commission investigators, Culture Farms was processing investor-grown cultures and sending them back to Activator Supply Co. of Pahrump, Nev., for sale to new investors.

Postal inspection authorities in Kansas said thousands of pounds of the odoriferous cultures are creating problems for postmasters around the country who are refusing to move the packages through the mails.

Culture Farms’ filing came a month after a Kansas judge barred it from selling unregistered securities. In its filing, the company lists 27,000 creditors, assets of $1 million and liabilities of $233,351.

Federal investigators said they fear much of the money collected from U.S. investors has been moved out of the country. They declined to elaborate. However, Wurth, the Kansas securities commissioner, estimated in a court hearing that as much as $63 million was involved.

Last month, the California Attorney General’s office obtained a court order freezing Activator Supply funds held by the Bank of America in San Francisco and smaller banks around the state. Bank of America officials said bank privacy laws prohibited them from saying how much money was involved.

A similar culture-growing operation swept South Africa in 1983 and 1984. South African investors lost more than $200 million before the government stepped in and closed down the companies involved last November.

Culture Farms officials could not be reached for comment Friday, but according to the bankruptcy filing, Culture Farms is “a company that purchases a commodity (lactic cultures) for resale to any interested party.”

A federal grand jury sitting in Topeka has been investigating the culture-growing investment, according to Roland Nocera, president of Activator Supply, which sold investors the culture-growing kits for $35 each. Nocera could not be reached for comment Friday, but in a June interview, he said “Boy, if this culture is a security, it would be a big surprise to me.”

Nocera said he was cooperating with state and federal authorities because “I don’t want to violate the law, I want to stay in operation.”

From 1970 to 1973, Nocera served as president of Holiday Magic Inc., a defunct, San Rafael, Calif.-based cosmetic sales company. In 1977, he pleaded guilty to a federal securities fraud charge related to Holiday Magic’s operations.

In December, the culture growing operation moved to the United States from South Africa and has since spread to Canada, according to several Orange County investors who have received sales material from the Vancouver area.

Many of the same people coordinating the U.S. business were involved in the South African operation, including Paul Stemm of Irvine. Stemm, an attorney registered to practice in Illinois and a former executive for Holiday Magic, represents Ariate, a Netherlands Antilles company. Ariate sold Nocera’s company the U.S. rights to the culture.

Stemm could not be reached for comment Friday, but in a recent interview he denied having any involvement in the U.S. operation, other than selling the U.S. companies the rights to use the milk-based culture.

Oregon Attorney General Dave Frohnmayer recently called the culture-growing fad “the most sophisticated pyramid scheme of the 1980s.” A pyramid scheme relies on new investor funds to pay off earlier investors.

In recent weeks, California growers have been meeting and trying to collect $85 per person in an attempt to file some sort of legal action to recover their investments.