The California attorney general has filed a consumer-protection lawsuit against a California firm that sells cereal and coffee coupon books used as fund-raisers by PTAs and other nonprofit groups in Utah and other Western states.
The coupons have been sold in Utah by PTAs and Scout troops from Ogden to St. George, according to coupon distributors.The complaint alleges United Grocer's Clearinghouse and its owner, Steven Lee, operate a "Ponzi scheme" in violation of a number of California laws. The suit seeks more than $2 million in restitution and civil penalties, along with an injunction prohibiting the company from futher violations of California law.
According to the California Attorney General's Office, United Grocer's Clearinghouse targets nonprofit organizations to sell coupon books redeemable for brand name cereals or coffee. The attorney general alleges that UGC sells the coupon books to distributors who, in turn, sell the coupon books to the public at a higher price. UGC has required that distributors set the consumer price for the coupon book at $30. Each book contains 30 coupons.
The coupons are redeemable for either one large box of breakfast cereal or one can of coffee. Consumers can claim the cereal or coffee by mailing one coupon, along with an official order form, to UGC.
The company then sends the product and a new order form to the customer using UPS or Priority Mail. Consumers may redeem only one coupon at a time. Some shipments have taken up to eight weeks to arrive, according to court documents.
According to California Attorney General Dan Lungren, UGC receives an average of 40 cents per coupon from distributors. But the company pays up to $7 to buy and mail each box of cereal or can of coffee, placing UGC in a money-losing position.
Lungren and Santa Cruz County District Attorney Art Danner allege UGC's operating procedures are "a variation of a Ponzi scheme."
The company receives money from distributors and then makes payment with products paid for by money obtained by later distributors, rather than profits, according to statement issued by the Attorney General's Office.
This creates the illusion of a legitimate profit-making business opportunity and entices further investment. The complaint alleges that the "Ponzi scheme" will eventually collapse, leaving hundreds of thousands of consumers with worthless coupons and distributors with a supply of worthless coupons.
Telephone calls placed to UGC offices in Costa Mesa, Calif., were not answered. Telephone messages were not returned.
An answering machine message said business operations had been suspended pending a court hearing later this month.
One distributor, Lisa Swanson of Sugar City, Idaho, said she and her husband had about $50,000 invested in the company. The couple checked with the California Better Business Bureau before investing, but Swanson said she is concerned they may lose their money. Swanson said she had received assurances in an e-mail transmission from UGC officials rebutting the lawsuit.
"We feel like we're honest people who acted in good faith, just as the schools have, and then this happens," Swanson said. "Our name has been dragged through the mud, and it's not our fault."
The company says it can sell cereal and coffee at dramatic loss because, in its shipments to consumers, it includes advertisements for products such as jewelry, small electronic equipment and flavored coffees that customers may purchase with coupons and money, according to the California attorney general.
The complaint states that UGC has misrepresented the program, suggesting that cereal and coffee manufacturers are participating in UGC's promotion when they are not and that consumers who have purchased coupon books will be able to redeem all of their cereal and coffee coupons when "in fact, it will be unlikely they will be able to do so."