Judge Delays Appointing Trustee for FundAmerica

SANTA ANA — A federal bankruptcy judge on Tuesday delayed for at least 30 days the appointment of a trustee to assume management of FundAmerica, the controversial Irvine multilevel marketing firm that authorities in California and several other states have accused of operating a pyramid scheme.

U.S. Bankruptcy Judge James N. Barr ordered FundAmerica to allow an independent examiner to review its business practices and company records, but temporarily denied a request by Florida regulators to name a trustee.

FundAmerica and its founder, Robert T. Edwards, are facing criminal charges in Florida of running a pyramid scheme. The company filed for Chapter 11 bankruptcy protection from creditors last month and has temporarily stopped selling memberships.

The examiner is required to file a report by Oct. 15 that will include a recommendation on whether FundAmerica’s current management should be allowed to continue running the company, or whether a court-appointed trustee should take over.

Sally S. Neely, an attorney representing the state of Florida, claimed that FundAmerica President Mitchell Blumberg had close ties with FundAmerica’s past management. Blumberg, she said, is “part of the problem, not part of the solution.”

Blumberg, once one of FundAmerica’s top salesmen, has said he had minimal contact with Edwards, who resigned shortly after his arrest on July 19.

“This was an illegal, fraudulent scheme. It was perpetrated on hundreds of thousands of people and this court and the bankruptcy system should not be used to hide them,” Neely said. “It would simply impugn the integrity of the bankruptcy system if the same people are (left) in charge.”

But FundAmerica attorney Lawrence Bass asked Barr not to appoint a trustee. He said some Canadian investors who have provided $1.3 million to help keep FundAmerica’s parent company afloat would stop contributing if a trustee is named.

“If a trustee is appointed,” Bass said, “it would be the death knell for FundAmerica.”

Besides deciding who should run FundAmerica, the examiner will look into about $17 million in overseas fund transfers Edwards allegedly made before he left the firm.

Authorities in California and several other states have contended that FundAmerica is a well-disguised pyramid scheme that relies on the sale of memberships for most of its revenue. But company officials say it is a legitimate consumer club, obtaining discounts for its members on such services as long-distance telephone calls.