Fund-Raiser Accused of Ponzi Scheme

A Costa Mesa-based company that bills itself as a fund-raising vehicle for nonprofit organizations instead is operating a Ponzi scheme that is placing millions of dollars in consumer funds at risk, California Atty. Gen. Dan Lungren alleged Thursday.

Lungren’s lawsuit, filed Thursday in Los Angeles County Superior Court against United Grocer’s Clearinghouse, seeks more than $2 million in restitution for customers and distributors and an additional $2 million in fines.

The complaint alleges that UGC and its president, Steven Lee, violated several state laws, including failure to register with the attorney general’s office and neglecting to provide required disclosure statements to distributors.

UGC sells coupon books that groups such as PTAs can resell during fund-raisers. The books are redeemable for name-brand cereal and coffee, which UGC then mails from its Costa Mesa warehouse.

Lungren alleges that UGC’s business plan is a “variation on a Ponzi scheme” because the company uses money from newly signed distributors--rather than true profit--to pay for the cereal and coffee it ships from its warehouse.

UGC executives on Thursday declined to discuss specific allegations in the complaint, but they maintained that the company, in an office park near John Wayne Airport, will continue with its normal operations.

“The allegations in the complaint are just that--allegations,” said Ron Cooper, an attorney representing UGC. “We feel confident that when the attorney general fully understands our operation that we will be vindicated.”

The 1-year-old company, which has more than 250 distributors nationwide, has been embraced by scores of schools and nonprofit organizations, including a nonprofit school-related group in Irvine that raised about $15,000 in late 1995.

“I don’t know what to say,” said Elizabeth Thomas, executive director of the Irvine Education Foundation. “When we used them, it worked out fine. But I don’t know what to think now.”

The attorney general’s lawsuit alleges that UGC has been illegally selling the coupon books to distributors, who in turn sell them to PTAs and other organizations at a higher price. Nonprofit groups are allowed to keep a percentage of the total revenue raised during sales.