Independent Trustee Urged to Take Over FundAmerica

A federal bankruptcy examiner has recommended that an independent trustee be appointed to run FundAmerica, saying the current management of the troubled network-marketing company is too closely tied to its controversial founder, Robert T. Edwards.

The examiner’s report also concluded that about $30.8 million of FundAmerica’s assets went to company insiders, including $6.4 million paid directly to Edwards.

Edwards, a Newport Beach resident, was arrested July 19 in Florida on criminal charges of operating FundAmerica as a pyramid scheme. He is accused of starting similar firms on three different continents over the last 20 years.

He has pleaded not guilty to the charges filed in Florida.

Edwards resigned from the Irvine company after his arrest, and court records show that he sold an 87.5% interest in FundAmerica for $1,000 to a friend of a business associate. If acquitted of the criminal charges against him, he can reacquire 62.5% of the stock for $650 Canadian, according to bankruptcy examiner Ronald L. Durkin’s investigation.

FundAmerica, including its president, Mitchell Blumberg, has repeatedly said that all ties with Edwards have been severed, especially after the company was hit with a class-action lawsuit and was forced to file for Chapter 11 bankruptcy protection from creditors late this summer.

Durkin--appointed by a federal judge last month to look into FundAmerica’s operations--drew a different conclusion.

“The examiner determined that current management has substantial ties to the former principal of the debtor (Edwards),” Durkin said in a report filed Tuesday in U.S. Bankruptcy Court in Santa Ana. “This ongoing relationship is both a personal and business relationship which dates back to the late 1970s.”

FundAmerica officials declined to comment Tuesday.

Some of the controversy surrounding FundAmerica has centered on $11.3 million that Edwards wired to mysterious foreign entities--known as Acheteur International and Theta Ltd.--in the Netherlands and Hong Kong respectively. Durkin said he suspects that Edwards may own at least a portion of these companies.

“The ownership of . . . Acheteur is not presently known although . . . the connections to Edwards are strongly suggested,” Durkin said.

Durkin’s 71-page report concludes that FundAmerica may have to file lawsuits against those entities to recover that money.

FundAmerica has steadfastly maintained that its core business is providing members with discounts on such services as long-distance phone calls, but regulators in several states say its primary purpose was to attract a steady stream of members who would then sell more and more memberships.

After a four-week examination of FundAmerica, Durkin declared that his findings indicated that “a pyramid scheme has been perpetrated.”

For instance, he found that fewer than 10% of the memberships sold were actually used for their stated purpose--getting discounts on products and services.

“The debtor sold about 800,000 wholesale memberships of which only about 79,000 were activated retail memberships,” Durkin concluded. “Actual usage ranged from 200 members for the condominium program to a maximum of about 13,000 members for the credit card program.”

Durkin also found that some of the discount services were readily available to any consumer, not just those belonging to FundAmerica. Durkin’s report said that at least three of the discounts were subsidized by FundAmerica, which was using membership fees to increase the savings offered by the companies themselves.

The report concluded that FundAmerica was a pyramid scheme that would eventually collapse once it started to register a decrease in new members.

“The massive wholesaling of memberships was the activity which generated the huge cash flows allowing the debtor to pay operating and administrative costs, fund member rebates, pay usage bonuses to independent representatives and pay significant sums to related parties during such a short period of time,” Durkin said.

FundAmerica has since revised its membership sales program, although a federal judge has temporarily barred the company from selling any new memberships. Durkin said his study showed that the company’s marketing program is virtually unchanged.

“The revised marketing program offered by the debtor is substantially the same as the previous program,” Durkin’s report said.

He questioned whether the company could stay afloat.

“The various legal battles being fought within the bankruptcy court and outside it may seriously impair the debtor’s ability to reorganize,” Durkin concluded.