California-based FundAmerica Inc. has been ordered by the Utah Division of Securities to explain why the company should be allowed to continue doing business in this state.
A Utah Department of Commerce statement says that the company has been selling unregistered securities in a so-called pyramid scheme. FundAmerica is required to meet with a division representative on Aug. 17.According to the statement, "FundAmerica generates income through a scheme which supposedly allows marketing personnel higher up in the organization to derive profits substantially from the sales efforts of those people below them."
The division says this management compensation package constitutes a security which must be registered with the state under Utah law. The state says payments from FundAmerica to representatives at all levels of the company are primarily or exclusively derived from funds invested by other FundAmerica representatives.
"If the distribution system in FundAmerica constitutes a security, we want to make sure that it complies with Utah law," said John C. Baldwin, director of the Division of Securities. "We've had a very difficult time determining exactly how the operations run because of the loosely knit organizational network and because members and representatives claim to be independent from company management even though they are dependent upon that organizational structure."
An order issued by the division requires the company to explain why its practices do not violate Utah law when information received by the division indicates otherwise, Baldwin added.
According to the statement, the division has obtained FundAmerica literature indicating members in the organization make money through a distribution chain which depends largely upon the success of new members introduced to the organization. Members are attracted to the plan by promises of discounts for long-distance telephone calls, floral wire services, travel arrangements and purchases through a national products retailer.
Nearly $20 million in FundAmerica bank accounts are currently frozen in California where the company is subject to a class action lawsuit.