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Fraud Suits Multiply Against New Source, O.C. Entrepreneur

Times Staff Writer

As the months pass and the government’s fraud investigation against them heightens, David Sterns and New Source Ltd. are finding themselves in increasing legal trouble, the targets of civil lawsuits alleging everything from non-payment of bills to stock fraud.

The lawsuits paint a picture of a network of companies and individuals conspiring to defraud investors, business owners, banks and others in a complex scheme that leaves many victims in penury.

“This isn’t your typical boiler room,” said Postal Inspector James C. Vach, who is investigating Sterns and his companies. “These people have advanced degrees. And they are very sophisticated.”

Postal inspectors say that one of the civil suits, filed last November by Orange National Bank, provides a clear example of how Sterns operates and led in part to a law enforcement raid on New Source headquarters last Thursday.

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During that raid, about 40 agents from six regulatory bodies swooped down on the Irvine industrial building that houses New Source and gathered boxes and cabinets filled with documents--an estimated 10 tons of potential evidence in an ongoing investigation into alleged tax and securities violations and mail fraud.

The bank’s lawsuit alleges that Sterns, New Source, and a variety of other companies and officials defrauded Orange National Bank out of $225,000 in a credit card scheme tied to the telemarketing sale of a diet aid called Le Patch.

According to company brochures and court documents, Le Patch is an adhesive device containing a proprietary formula called Cephatrex, a formula that New Source claims will “permeate the skin, enter the bloodstream and occupy part of the brain so it will not receive hunger signals.”

The U.S. Food and Drug Administration has never approved the sale of such a device and has even published a position paper saying that diet patch products have never been proven effective for anything.

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Sterns contends that he currently has no official relation to New Source and that New Source sold the Le Patch product line to another company. But court documents continue to show Sterns as head of a group of allied companies referred to as the “Ultimate Business Network,” one of whose products is the controversial patch.

Consider:

The Orange National Bank suit says that New Source, along with sister companies OmniSource and Fountain Industries, were “completely controlled, dominated, managed and operated” by Sterns and a handful of other defendants.

The suit also says Sterns and others “intermingled the assets and liabilities of each (company) to suit the convenience of the individual defendants in order to evade the payment of the obligations owed to creditors.”

It alleges that OmniSource, New Source, Fountain and a small firm called North Orange Medical Laboratory operated “a credit card scheme to telemarket throughout the country diet patches which were not approved for sale.”

This is how the credit card scheme worked, according to papers filed in Superior Court in Santa Ana:

North Orange Medical does diagnostic blood tests and sells blood test kits. Its owner is a man named Joe Yglesias.

As part of his business, Yglesias had a merchant credit card account with Orange National Bank, an account that let him take payment in credit card form for goods and services that were already delivered.

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At the behest of Sterns, the records say, Yglesias loaned his account to New Source, because New Source had no merchant account and no ability to take credit card orders over the telephone.

New Source used the account to sell the diet patch and other products through a telemarketing operation based in Irvine. Court documents contend that this was against Yglesias’ contract with the bank because the contract prohibited use of the account for telephone sales in which payment is made before goods are delivered.

In addition, most of the money deposited in Yglesias’ account was immediately withdrawn by New Source, the documents say. The patches that distributors received were different from the merchandise they had ordered, so they began demanding--and receiving--repayment from their credit card companies.

The credit card companies charged the bank for the refunds, but because there was no money in Yglesias’ bank account, Orange National Bank was stuck with the bill--$225,000.

Howard S Fredman, the bank’s attorney, said the bank tried to attach New Source’s bank accounts but to no avail. As Fredman arrived at a hearing in Superior Court in Santa Ana last December, he said, he was served with papers announcing New Source’s filing for protection from creditors in federal bankruptcy court.

“That accomplished an automatic stay” of the attachment proceedings, Fredman said. New Source’s attorney “told the creditors that we had forced him into bankruptcy.”

Neither Yglesias nor Sterns could be reached for comment.

And there’s more. Just ask Judith McKinish.

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In 1986, when McKinish met David Sterns, she was owner of a small company called All Brite Mobile Home Service. Her company washed mobile homes and painted on a protective coating. It gave her enough money, she said, “to survive and raise three children.”

Sterns, she said, offered to take her company public and told her that she could make millions of dollars and that she’d never have to worry about the future again.

He offered her a salary of $42,000 per year for 2 years to stay on in a managerial position, told her she’d have medical insurance and said he would give her $400,000 worth of unissued stock in his company Ameritex Inc., another member of the Ultimate Business Network, court documents show. All this in exchange for control of her company.

McKinish signed the contract and soon after was hospitalized for 2 months with an abscess on her kidney. When she was in the hospital having her kidney removed, according to McKinish and court documents, she found out that Ameritex had fired her employees, failed to provide the promised medical insurance and took over the operation of her business.

“On or about Aug. 28, 1986, and continuously since then, defendants . . . began to operate All Brite utilizing plaintiff’s equipment, customer list, name and contracts for material,” McKinish’s lawsuit says.

The Ameritex stock that McKinish was supposed to receive never materialized. And she drew a salary for only a few months of the agreed 2-year period.

She lives with her parents in Fountain Valley. Her youngest daughter is staying with her paternal grandmother because McKinish can no longer afford to care for her.

“They took my confidence and my business,” said a tearful McKinish. “Years have just been pulled out of my life. I haven’t been the same. . . . I never dreamed I wouldn’t have a dime in my pocket.”

A similar suit was filed last September against Ameritex, Verle Sterns, David’s brother, and Mark Sterns, David’s nephew, on behalf of Seal Engineering Inc. of Huntington Beach and its owners, Joseph Jaswell and his sons Paul and Robert.

It is a civil fraud and breach of contract suit for at least $900,000. According to the suit, Ameritex, the Sternses and several other defendants allegedly agreed to buy Seal Engineering--and a building owned by the company--and hire the Jaswells.

The suit said Ameritex and the other defendants reneged on the deal.

The Jaswells “didn’t get paid a dime as far as consulting or employee wages,” said Mark Huston, the Jaswells’ attorney. “They lost the building in a bankruptcy. They don’t have the business any longer.”

Huston characterized the Jaswells as “common folk, hard-working people” who built their business through years of effort.

“Having to go to bankruptcy is really drastic for them,” Huston said. “To have their credit screwed up, it’s a real big deal. When your reputation is gone, your whole life is gone.”

Then there are the vendor and landlord suits. Transdermal Products Inc., for one, has sued Jonathan Sterns, David’s nephew, and another Ultimate Business Network company called Gentre Laboratories Inc.

The suit calls Gentre a shell for Jonathan Sterns and other defendants, “a sham without capital, assets, stock or stockholders.” Gentre was formed, the court documents say, so that Sterns and others could “avoid individual liability and for the purpose of substituting a financially insolvent corporation in place of” Sterns and other defendants.

In May, 1988, when New Source was just beginning to market its Le Patch product line, Transdermal Products agreed to manufacture and package 6 million patches for $1.23 million. Gentre paid Transdermal $720,000, but still owes the company $511,466, documents show.

Meanwhile, New Source may not have a home for much longer. In January, its landlord filed an unlawful detainer suit, asking that New Source vacate its Irvine premises and seeking more than $55,000 under a law that will triple the damages if the landlord wins.

The civil suits are in discovery, in preparation for trial. The government investigation into New Source continues, as investigators pore over tons of company documents. The legal process grinds on, with resolution at least a year away.

For as Postal Inspector Vach says: “This is a big case. We could investigate this case for the rest of our lives, it’s so complex.”

‘THE ULTIMATE BUSINESS NETWORK’

Court records and government investigators contend that the following companies make up “The Ultimate Business Network,” a group of 36 interrelated businesses with David Sterns at its head. Sterns says he does not head the group and is only president of OmniSource Inc., one of the many. Sterns and the companies are under investigation by the U.S. Postal Inspection Service, the Internal Revenue Service and the Securities and Exchange Commission for tax and securities violations and mail fraud.

Aba Systems

Acrotech Inc.

Advanced Technical Systems

Ameritex Inc.

Applied Business Systems

Applied Transdermal Systems Inc.

Avante Nutritional Associates

BDX Medical

Chavco-Max

EME Industries Inc.

Fashion & Time

Products Inc.

Forcon Technology Inc.

Fountain Industries

Genex Industries Inc.

Gentre Laboratories Inc.

Genuine Lifestyle

Products

(dba for V&T;)

Genuine Suspension

Gold Equities Inc.

The Huntor Group

Isotonix Inc.

Jean Pierre Products

Merit Informational Systems

New Source Ltd.

Novar International

Nutra-Herb International

OmniSource Inc.

Poco Grande

Posh Ware

Primeritexx Inc.

Protectin Corp.

Somas Medical

Stalco

Sullins Electronics

Tile Fashions Inc.

VIS

Wake Forest Minerals

Source: U.S. Postal Inspection Service


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