FundAmerica, the controversial Irvine network marketing company, and several of its officials--including company director and noted economist Arthur Laffer--are the targets of a $150-million class-action lawsuit alleging fraud and racketeering.
The suit, filed Tuesday in federal court in San Francisco by FundAmerica member Douglas R. Slain, comes less than a week after California authorities raided FundAmerica’s offices in Irvine at the request of Florida regulators, who have accused the 4-year-old firm of operating a sophisticated pyramid scheme.
FundAmerica’s president, Robert T. Edwards, was arrested last week and charged with organized fraud and unlawful lottery activity. He has been released on $1-million bail.
Slain’s suit accuses the company of fraud, racketeering, false advertising, unfair business practices and illegal securities practices. Slain’s racketeering accusation was filed under the provisions of the Racketeer Influenced and Corrupt Organizations Act, which provides for treble damages.
Slain, of Sausalito, is also seeking to bar FundAmerica from continuing to promote its program.
Slain’s attorneys have asked a federal judge to certify his complaint as a class action, which would make plaintiffs out of FundAmerica’s estimated 100,000 members. The suit claims that FundAmerica members have lost more than $50 million investing in FundAmerica.
Roma Theus, an attorney for FundAmerica, said Wednesday that he was unaware of the suit. “I have not seen a complaint or a summons, nor have I had any contact with anyone in the matter,” he said.
Laffer, once an economic adviser to President Reagan, resigned Wednesday from FundAmerica’s board of directors, claiming he was misled by Edwards.
In a letter dated July 25 and sent to FundAmerica, Laffer wrote: “I have had enough time to consider carefully my role with FundAmerica. My conclusion is simple enough. I don’t wish to continue having any relationship with the company.”
Laffer, who provided a copy of his letter to The Times, also asked that FundAmerica discontinue using his name or associating him with the company in its promotional materials. “Had I known when you asked me to join the board what has been revealed over the past week or so,” Laffer wrote, “I never would have joined the board in the first place.”
Slain’s complaint says that Laffer appears in a FundAmerica promotional videotape in which he “extols the purported benefits of participation” in FundAmerica. In May, Texas authorities prohibited the video from being played at investment seminars because it was “materially misleading and deceptive,” according to the lawsuit.
Laffer declined to comment on the video.
FundAmerica operates in eight states and is under investigation in at least three, including California. But Florida is the only state to file criminal charges against the company.
Florida regulators have said the company is a dressed-up version of an age-old scam: the pyramid scheme. They say FundAmerica has no real product and derives all its revenue from membership fees. But FundAmerica officials say the company operates a legitimate multilevel marketing program whose principal business is getting members discounts on such things as airline tickets and long-distance phone service.
The company rewards existing members with sizable bonuses for attracting new members, a practice Florida regulators say is pyramiding. The problem with pyramid schemes is that they eventually collapse because they depend on a continuing stream of new members.
The Slain suit alleges that 98% of the company’s revenue comes from members’ dues and that the discounts offered to attract members are widely available from companies that don’t charge membership fees.
“No one need ever purchase a FundAmerica membership for actual use or actually make use of any of the services purportedly offered through FundAmerica in order to . . . reap substantial commissions and bonuses,” the lawsuit claimed. “In effect, the membership application forms are the product in which FundAmerica’s independent representatives deal.”
The product discounts offered by the company are sometimes partially paid for by FundAmerica itself, Florida officials maintain. For instance, the company might offer a 5% discount on an airline ticket but then pay for two-fifths of that discount with members’ dues.