FundAmerica Fires CEO Ruff after 1 Week : Investment: The firm, accused of being run as illegal pyramid scheme, may file for Chapter 11 protection today. Ousted Howard Ruff blames friends of the company’s founder, who was arrested last month in Florida.
FundAmerica Inc. has fired Howard Ruff as president and chief executive just a week after he joined the troubled firm, and a company source said Monday that it may seek protection from its creditors with a Chapter 11 bankruptcy filing as early as today.
Howard Ruff, the nationally known investment guru who last week heralded his appointment as the “rebirth and resurrection” of the company, said he was fired late Sunday at the behest of shareholders who are friends of FundAmerica founder Robert T. Edwards.
On July 30, Ruff replaced Edwards, who was arrested by Florida authorities on charges that he was running FundAmerica as a pyramid scheme. Ruff, 59, had said he thought the company was run as an “honest business” when he took over, but a closer look at the books changed his mind.
Last Friday, he revealed that Edwards paid himself $5.4 million in salary this year and had another $11.3 million wired to the Netherlands and Hong Kong for unknown reasons, all before his arrest July 19.
“I was sacked because I revealed true but damaging information about Bob Edwards,” Ruff said in a statement Monday. “I intend to make sure that the public becomes fully aware of all questionable money transactions and practices of founder Bob Edwards and of FundAmerica that come to my attention.”
Ruff said he was fired Sunday night at a shareholders meeting of FundAmerica’s Canadian parent company. He identified those who demanded his ouster only as “Edwards’ friends.”
Houston developer Mitchell Blumberg was named to replace Ruff.
In announcing the management changes, FundAmerica also said in a statement late Monday that “a plan for reorganization is being worked on.” A company insider said a Chapter 11 filing, which would allow the company to continue operating while its debt is restructured, could be made today.
“Those of us who have been working here are hopeful we can resolve these differences to the satisfaction of the representatives in the field,” the company’s release said.
When Ruff took over the company reins, he said that he and several unnamed investors intended to acquire the firm. But the recent developments made that impossible.
“The trustee representing the Canadian holding company which owns FundAmerica did not live up to his agreement that I would have two to three weeks to infuse capital into the business, and that the company would not enter a Chapter 11 bankruptcy without my concurrence,” Ruff said in his statement.
Edwards, who is free on a $1-million bond, is suspected of masterminding pyramid schemes on three different continents. His whereabouts are unknown.
Florida officials are scheduled to indict FundAmerica on Thursday on charges that it is a pyramid scheme. Those regulators--and the California attorney general--claim the company is a pyramid or endless-chain scheme, deriving nearly all of its income from new members rather than from a product or service.
On Monday, California Atty. Gen. John Van de Kamp said his office had discovered that while FundAmerica had about 100,000 members, it had sold perhaps as many as one million memberships.
The company “was engaging in ‘inventory loading’ by persuading many participants to buy memberships in bulk to attain a high level in the scheme to boost their earning potential. However, many have been unable to resell their memberships,” Van de Kamp said in a statement.
Texas authorities report similar findings. Kelly Fero, a spokesman for the Texas attorney general, said there are 140,000 memberships “floating around Texas,” but only 12,000 actual members.
Some FundAmerica members have filed a $150-million fraud lawsuit against the firm. During a Monday hearing on the suit in San Francisco, U.S. District Court Judge Marilyn Patel ordered FundAmerica to cease membership sales altogether.
Patel also strengthened a temporary restraining order against the company by saying that it could no longer pay commissions to its sales force. She had previously allowed the company to pay sales people up to $3,000 for recruiting new members.
FundAmerica officials had said that the company is a legitimate enterprise, obtaining cash rebates for members on services, such as long-distance phone calls and travel.
Ruff said Monday that he still believes the “program was worthwhile,” but that he “cannot in good conscience continue with such management, even if the company can survive, which I doubt.”
Last Tuesday, Ruff had led a rousing meeting for thousands of FundAmerica members at a Costa Mesa hotel. He came across like a prophet there to rescue them from a very perilous situation, some observers said.
“The focus that you folks have, and the momentum which we can generate once we get moving again, can create something astounding, better than you had before,” he said to a round of applause.
He said he took over FundAmerica because he was the most qualified person to fix it.
“I thought I could do it. I thought I could accomplish it and there was no one else in the wings to step forward,” Ruff said last week.
Ruff is best known as a doom-and-gloom forecaster, having authored the 1978 bestseller, “How to Prosper During the Coming Bad Years.” He also writes an investment newsletter, The Ruff Times.
Some 1,500 subscribers to his newsletter bought into FundAmerica after he wrote a favorable article about the company. Ruff said he felt obligated to those people in particular.
“I would be remiss in my responsibilities if I did not do everything I can to make sure they get full value for their money,” Ruff told the audience last Tuesday.
He said he thought he could help FundAmerica over its cash crunch--including a freeze on its assets after the filing of the $150 million class-action lawsuit--because he had “influential wealthy friends” eager to invest in the firm.
“I have reason to believe I’d be able to accomplish it or I would not have stuck my neck into this noose,” Ruff said last week.
He also mentioned the possibility of a Chapter 11 bankruptcy filing, but he said he thought it was more likely that the company would thrive and even go public someday.
