2 Brothers to Plead Guilty, Aid Diet Patch Inquiry : Courts: The target of the criminal investigation over alleged mail and securities fraud is their uncle, who headed several South County firms. Investors lost up to $11 million.

Federal authorities said Thursday that they have filed mail and securities fraud charges against two brothers involved in a scheme to raise millions of dollars for a phony diet patch that was supposed to suppress hunger.

Jonathan D. and Mark A. Sterns, both former Orange County residents, agreed to plead guilty to the charges and to cooperate in the ongoing criminal investigation of several firms headed by their uncle, David A. Sterns.

The charges against the Sterns brothers and the plea agreement were filed Wednesday in U.S. District Court in Santa Ana. According to the agreement, the U.S. attorney general’s office, in return for the brothers’ assistance, has promised not to make more charges against them in the case.

Assistant U.S. Atty. Paul L. Seave said the number of investors defrauded by the patch scam and the amount of money lost is still being determined. In March, 1989, Postal Inspector James C. Vach estimated that about 22,000 investors had been bilked out of $9 million to $11 million.

Mark Sterns, 34, who now lives in Texas, and Jonathan Sterns, 30, who lives in Florida, are expected to enter a formal guilty pleas Monday in Santa Ana to one charge of mail fraud and another of conspiring to sell unregistered securities. They could not be reached for comment.

The brothers could each face a sentence of up to 10 years in prison and a fine of up to $500,000, plus be ordered to pay restitution, with the court deciding how much of the losses are their responsibility.

However, in a letter to the brothers’ attorney, federal authorities said they will recommend that the court impose prison sentences of not more than five years.

The brothers have agreed to “cooperate fully” with the Justice Department in helping to complete an investigation in progress for two years. Among other things, they have promised to “respond truthfully” before a grand jury or at trial and to “produce voluntarily any and all documents, records and other tangible evidence.”

In March, 1989, law enforcement agents from a half-dozen regulatory agencies swooped down on the Irvine headquarters of the diet patch business and loaded two postal trucks with potential evidence.

The Postal Service, Securities and Exchange Commission and the Internal Revenue Service have been involved in the investigation.

The main target was David Sterns, the uncle. The Justice Department alleges that the brothers were part of a scheme conceived by their uncle in early 1988 to manufacture and distribute a device called Le Patch. Worn on the skin, it was purported to have been designed by a UCLA doctor and to have the ability to suppress appetite.

Federal officials allege that David Sterns--operating through former South Orange County corporations named Gentre Laboratories Inc., Omnisource Inc. and New Source Ltd.--made or had others make “false and fraudulent” representations that led investors to wrongly believe that Le Patch could be sold without approval from the Food and Drug Administration or that the device had obtained FDA approval.

David Sterns, who has denied wrongdoing, could not be reached for comment.

The U.S. attorney general’s office said that if the case against the brothers had gone to trial, the Justice Department would have sought to prove that Jonathan Sterns, who was made president of Gentre by his uncle, “assisted in making arrangements for the manufacture of the appetite suppressant, knowing that FDA approval, though required, had not been obtained, and knowing that the device ultimately manufactured and distributed was in fact not the device invented by the UCLA doctor.”

Mark Sterns was president of other companies not involved in this case that were controlled by his uncle, but he also played a role in the patch business, Seave said.

The brothers have been charged with joining others in creating “backdated, false corporate documents in order to create the false appearance that the securities of corporations controlled by David D. Sterns could be freely traded without being registered with the SEC.”

It is further alleged that David Sterns sent a newsletter through the mail that falsely said distribution of the patch was being delayed until a larger and more efficient manufacturing process was arranged, when in fact no manufacturer had agreed to make it.

Seave said that although the brothers are not believed to have worked on the mailings, they are culpable, because they were involved in the overall scheme.