FundAmerica CEO Says Founder Was Paid $5.4 Million
The new chairman of beleaguered FundAmerica Inc. said Friday that a review of the firm’s books revealed that company founder Robert T. Edwards was paid $5.4 million thus far this year and mysteriously wired $11.3 million to two foreign entities.
Howard Ruff, who was also named chief executive of FundAmerica earlier this week, said these payments and wire transfers raise serious questions about Edwards, who was charged two weeks ago with operating FundAmerica as an illegal pyramid scheme in Florida.
“To put it mildly, it blew me away,” said Ruff about the company’s payments to Edwards. “That’s several times more than the CEOs in most Fortune 500 companies” earn.
The financial revelations came as an official of the California attorney general’s office filed a statement in federal court alleging that FundAmerica operated an “illegal pyramid or endless chain scheme” in California, where the company is under investigation.
The developments come a little more than two weeks after Florida officials arrested Edwards and charged him with running an illegal lottery. Florida officials allege that Edwards bilked $8.2 million from state residents.
Edwards, who is free on a $1-million bond, has denied the charges, calling FundAmerica a legitimate multilevel marketing company. The company sells memberships for a fee in exchange for rebates on various goods and services. Representatives who sell memberships receive bonuses. The firm has about 100,000 U.S. members.
Ruff said Friday that Florida officials have told him that they will indict the corporation itself on criminal charges Thursday. Florida prosecutor Peter Antonacci confirmed Ruff’s statement, although he would not discuss the specific charges.
“This was not unexpected,” Ruff said. “Other companies in network marketing have come under indictment and survived. It does not automatically mean the death and demise of FundAmerica.”
Ruff, who writes a nationally known investment newsletter, announced earlier this week that he and several unnamed associates intend to buy FundAmerica and try to save it from bankruptcy.
Ruff said in a meeting with supporters Tuesday that his first look at FundAmerica’s books indicated that there had been no improprieties and that the company could be put on a sound footing. He seemed less certain Friday.
“I could PR you and say, ‘No, no we are going to save this,’ ” Ruff said. “I honestly don’t know.”
This came after he released a FundAmerica financial statement that purported to show that Edwards received a $1-million-a-month salary since May and took $316,821 in bonuses between January and June. The bonuses were paid to Edwards for his role in attracting new members, Ruff said.
What’s more, Edwards was paid $3.1 million in management fees, according to the FundAmerica statement.
Edwards, according to Ruff, personally wired $10.5 million of FundAmerica money to a Netherlands entity between October, 1989, and June of this year. Ruff said these were royality payments made to an unknown individual who helped Edwards with the idea of starting FundAmerica.
“Some person unknown . . . was paid 12.5% of the gross receipts,” Ruff said. Wire receipts released by FundAmerica showed that the money was transferred from a FundAmerica account at First Interstate Bank in Los Angeles to Lloyds Bank in Holland.
Ruff also said Edwards wired $827,049 to another entity in Hong Kong between Oct. 31, 1989, and May 23, 1990. Ruff said the money was interest owed to an unknown party who made a $4-million loan to FundAmerica.
Edwards “went personally to the bank and wired these funds,” Ruff said.
He said Edwards began receiving a regular salary of $1 million a month shortly after payments to these entities stopped.
“The idea was rather than have the payments go in this form, they would simply give him a $1-million-a-month salary,” Ruff said. “I assume it was because he wanted at least some of the profits of these entities.”
The money wired to foreign countries and the salary paid to Edwards amounts to about $17 million, according to the FundAmerica financial statement provided by Ruff.
Ruff said the company’s directors were aware of at least some of the payments made to Edwards and the entities.
Ruff said he has not spoken to Edwards about these payments: “I have no idea of the whereabouts of Mr. Edwards. Mr. Edwards made one call (earlier this week) to the company and asked to speak to me, and I chose not to speak to him.”
FundAmerica is struggling to survive and is desperately in need of cash. The company has $17 million in assets, nearly all of which was frozen at the order of the federal judge presiding over a $150-million class-action lawsuit filed in San Francisco against FundAmerica.
In a legal opinion filed in that case, Susan Henrichsen, California deputy attorney general, said Friday that FundAmerica’s marketing plan emphasizes that participants can pay money for the chance to make even more money by recruiting people into the organization.
“The money earned by such participants is based principally on their recruits’ purchases from the company, and not on sales” of a product or service, Henrichsen said.
Henrichsen said California’s FundAmerica inquiry is continuing. She said evidence shows that there were six to 10 times more memberships sold than there are actual members, a sign that memberships were sold over and over again without being used. She also said the company’s controller submitted information saying that for a three-month period, bonuses paid for services were just $155,000, while the bonuses paid for recruiting totaled $4.7 million.
Henrichsen said a federal court order issued last week freezing FundAmerica’s assets should be continued. She said the attorney general’s office is not planning to file charges against FundAmerica at this point so other enforcement actions will not be duplicated, diluting the company’s assets, which may be used for refunds.
