You Can't Cheat an Honest Man - James Walsh [105]
The delays caused bigger problems. In order to redeem UGC coupons, consumers were supposed to contact the company at its Costa Mesa, California, headquarters. But, if consumers contacted the manufacturers whose products were included in the UGC coupon books, those companies denied any connection to—or even knowledge of— UGC.
In early 1996, the California Attorney General’s office began an investigation of UGC. In March, Attorney General Dan Lungren announced a lawsuit against UGC. Lungren’s office based its charges on simple math: UGC had sold more than 210,00 books of 30 coupons each; this meant more than 6.3 million coupons were in circulation. UGC executives disputed the number as too high—but were unable to say how many had actually been sold.
UGC earned 40 cents per coupon from advertising sales but spent $7 to buy and ship each box of cereal. This meant that, if even one in four of the circulated coupons were returned at once, UGC would need more than $10 million to ship product to consumers.
Since the company had almost no financial resources to cover this kind of cost, the lawsuit concluded that UGC was a Ponzi scheme that would leave “hundreds of thousands of consumers with worthless coupons and many coupon book distributors with a supply of worthless coupons.”
The lawsuit asked for $2 million in civil penalties and restitution for consumers affected by the scheme. In addition, it asked for an injunction prohibiting the company from further violations of the California Consumer Protection Law.
UGC president Steven Lee started out defending his company’s practices vigorously...maybe a little too vigorously: “All of this talk of Ponzi schemes, a house of cards, fraud... is completely incorrect. This is not a fraud and nobody’s being ripped off.”
But this aggressive tactic didn’t last long. In an April meeting with deputies from the attorney general’s office, UGC agreed to a preliminary injunction, which allowed it to remain in business but prohibited it from selling any new distributorships without the appropriate registration. The injunction also prohibited the company from making any further misrepresentations.
UGC suspended its California operations a few weeks later, blaming its problems on media attention to the lawsuit. Telephone calls to the company were answered with a recorded message that told UGC coupon holders that they’d soon be able to use the coupons to get discounts on name-brand pantyhose. The record message concluded, lamely: “Both the attorney general’s filing and unfavorable media coverage have had a devastating effect on UGC’s ability to generate new revenues and to operate its day-to-day business.”
The message did manage to blame someone, though. It said that UGC had tried to restructure but “could not overcome the stigma that was created by the negative publicity heaped on UGC by the media back in March and April of this year.”
Word of the state attorney general’s suit stunned coupon holders and officials at NFP’s and schools that had used UGC coupons.
Southern California’s Irvine Education Foundation, which ran a fundraising event in the fall of 1995, was one of the first big groups to use UGC’s coupon books. IEF Executive Director Elizabeth Thomas said that her group had netted about $15,000 from a fund-raising drive in late 1995. It was considering a rebate to everyone who’d bought books.
At C.H. Taylor Elementary School in West Valley City, Utah, students had sold 200 coupon books valued at $6,000. According to school principal Orwin Draney: “Of that, $2,000 was for us and $4,000 went to [UGC].” He was hoping to offer some other service in place of the coupons.
By August, UGC’s recorded announcement had changed from whining about the Attorney General to saying that it had begun a liquidation under Chapter 7 of the bankruptcy code.
Most of the NFPs that had sold UGC coupons felt liable for returning money to supporters—though they weren’t, legally.
Albert Sheldon, an assistant attorney general in California, explained that people who’d bought coupons were creditors. They would