State Settles for $60,000 in Dispute Over Diet Patch : Investigation: An Irvine man and two Laguna Hills firms agreed with no admission of wrongdoing to settle state allegations of misrepresentation.

David D. Sterns and two firms he headed have agreed to pay $60,000 to settle claims by the state attorney general’s office that they made misrepresentations about a diet patch, allegedly sold through an illegal pyramid scheme.

In a settlement filed earlier this week in San Diego Superior Court, Sterns, 55, agreed to settlement with the state without admitting any wrongdoing. The two firms involved, OmniSource and New Source Ltd. in Laguna Hills, filed for bankruptcy last year.

Sterns, an Irvine resident who now runs a Torrance company, faces other legal problems. Court documents indicate that federal authorities are investigating Sterns and several of his relatives for alleged stock fraud involving several publicly traded companies he supervised, known collectively as the Ultimate Business Network, or UBN.

William Stocker, Sterns’ attorney, said Thursday that his client agreed to settle the state’s complaint only because he didn’t want to incur large legal bills fighting the complaint.

“They (state officials) enter into face-saving consent decrees when they can’t prove their case,” said Stocker. “They don’t have any evidence. We have better things to do than fight with them.”

OmniSource and New Source marketed Le Patch--a bandage-like device that was applied to the skin and supposedly reduced the wearer’s appetite by releasing a chemical that would seep into the bloodstream. A month’s supply cost about $50.

But state authorities filed a complaint against Sterns in 1988 charging that there was no proof that the diet patch worked and that the companies made false claims about it in advertisements.

“Defendants claim that Le Patch provides an effortless way to lose weight--a ‘dramatic breakthrough in weight control technology,’ ” Deputy Atty. Gen. Al Shelden said in the original complaint. Le Patch “has never been tested to show that it is helpful for weight loss and defendants have no reasonable basis upon which to base this claim.”

What’s more, the state claimed the two firms had falsely advertised that Le Patch had approval from the U.S. Food and Drug Administration.

The two companies had plans to market similar patches--about the size of a quarter--for alcoholics, smokers, premenstrual syndrome sufferers and even household pets.

New Source, according to Shelden, was a pyramid scheme because the company “paid commissions to distributors who brought new distributors into the marketing chain.”

Before it filed for Chapter 11 bankruptcy protection from creditors, the company had recruited more than 20,000 distributors nationwide, according to court documents.

Those distributors could work their way up the company and become silver, gold or diamond directors if they brought in enough new people and sold a substantial amount of patches.

Sterns acknowledged Thursday that even though the complaint is now behind him several more federal agencies--including the U.S. Postal Inspection Service and the Securities and Exchange Commission--are still dogging him.

UBN, which included New Source and OmniSource, may have raised as much as $15 million through the sale of stock and diet patches, according to federal and state investigators.

Debra A. Sterns, a UBN executive, and her father “were subpoenaed to testify and did testify before the grand jury and were targets of the criminal investigation,” according to a Sept. 8, 1989, declaration filed by Sterns’ former attorney, John Joseph Matonis. “The postal inspector . . . told me that the charges are serious and involve allegations of massive violations of federal and state fraud and consumer protection statutes.”

Federal officials confirmed the two were still under investigation.

“There is an investigation but we decline to comment at this time,” said Postal Inspector J.C. Vach.