Forty law enforcement agents from a half-dozen regulatory agencies swooped down on the Irvine headquarters of a diet-patch company Thursday, loading two postal trucks with potential evidence in an investigation into allegations of securities and tax violations and mail fraud.
New Source Ltd. and nearly 40 sister companies, called the “Ultimate Business Network,” are the target of a months-long investigation by the Postal Service, the Securities and Exchange Commission and the Internal Revenue Service.
At the heart of the investigation are “misrepresentations about products, particularly transdermal (skin patch) products,” Postal Inspector James C. Vach said.
In the last year, Vach alleged, the Ultimate Business Network has bilked about 22,000 investors out of $9 million to $11 million through the sale of patches, distributorships and securities in the network’s varied companies. He identified David Sterns as head of the group of companies.
“I believe David Sterns, Fountain Industries, New Source Ltd. and others have executed and continue to execute a scheme and artifice to defraud and to obtain money improperly from victims under false and fraudulent pretense,” Vach said in an affidavit filed along with the search warrant.
Sterns said he is president of just one company within the network and invites the scrutiny of law enforcement and regulatory agencies.
He said he hopes that the investigation will finally exonerate the firms: “We’ve been beset with rumors . . . that we’re marketing a transdermal patch that’s not FDA approved. The fact is that we have not been involved in that business since July 15, 1988. We have accepted no orders and accepted no cash.”
For nearly 8 hours Thursday, investigators with a federal search warrant trundled through New Source’s well-appointed lobby, carrying a steady stream of boxes and file cabinets into two waiting trucks. By 5:30 p.m, they had filled a 5-ton Postal Service truck and had halfway filled a 7-ton truck.
“This is a big case,” said Vach, who was seated near a sign proclaiming “Welcome to New Source, Products for Health-Wealth-Wisdom.”
“We could investigate this case for the rest of our lives, it’s so complex,” he said. “We now have to make a determination about how narrow to focus it.”
New Source has been under fire for nearly a year for marketing a skin-patch diet aid called “Le Patch.” Company literature says Le Patch is a an adhesive device containing a proprietary formula called “Cephatrex.”
It is designed to be placed anywhere on the body and is one element of a diet program that includes exercise, vitamins and a low-calorie diet, the brochures say.
According to the affidavit, New Source contends that “the ingredient will permeate the skin, enter the bloodstream and occupy part of the brain so it will no receive hunger signals.”
However, the FDA not only has never approved a diet-patch device, but released a position paper last year stating: “No manufacturer or distributor has presented evidence that any non-prescription skin patch for any use is safe and effective for any indication.”
Last December, New Source filed for protection from creditors in bankruptcy court in Santa Ana. At the time, Sterns said New Source sold “Le Patch” to a Phoenix company called V&T.; No such company is listed in Phoenix telephone directories.
Vach said Thursday that V&T; is actually an Orange County company that does business as Genuine Lifestyle Products and is a part of Sterns’ multicompany network.
No arrests were made Thursday, and no charges have been filed against the company or its officers. The investigation will continue for several more months, Vach said.