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Regulators, IHI parley terms of Mo. operation

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by Paul Flemming

SBJ Staff

Missouri regulators are discussing with International Heritage Inc. attorneys the terms under which the company may operate in the state without violating securities laws.

"We don't have a problem with them selling products," said Doug Wilburn, securities commissioner in Missouri's secretary of state's office. "The company may have violated Missouri law before it ceased offering" Retail Business Agreements.

The North Carolina-based IHI is a direct-marketing firm selling high-end items such as jewelry and gold. Use of its "Retail Business Agreements," as they had been used by the company, was barred by a federal judge in a complaint brought by the Securities and Exchange Commission.

Wilburn said a security is defined as the investment of money with the expectation of profit derived from the efforts of others. The structure of the Retail Business Agreements, which depended on new members recruiting others, met that definition, according to Wilburn and federal regulators.

Wilburn said IHI meetings continue; one took place in Joplin April 4.

U.S. District Judge Richard W. Story's April 3 order said "IHI shall not permit any further use of the Retail Business Agreement" or any other similar plan. The SEC contended in its complaint, that, among other things, the company's practices constituted the selling of securities that were not registered.

"Defendants contend IHI's program no longer includes the use of the Retail Business Agreement and prospective injunctive relief is not required," Judge Story's preliminary injunction order said. "However, the new plan retains elements from the old plan ... which cause the court concern about future violations."

Evidence presented in the federal case showed that IHI concentrated on selling new memberships more than on the sale of new products.

"Although IHI contends that it is a product-driven company, the facts demonstrate that, across the board, selling products was not IHI's primary operation," Story's order said.

The judge had earlier placed the company in receivership, and the receiver's accounting showed that about 90 percent of the company's revenues were from establishing or recertifying members.

"Participants testified that at IHI meetings there was little discussion of products, and prospective participants were told they could earn money faster through recruitment," the order said. "Furthermore, of the 569,440 total product orders since IHI's inception, 288,418 orders have not been filled."

"The complaints we've been receiving are from people who were trying to sell the products," Wilburn said of the the Missouri investigation.

Wilburn said any action by the state would address both any past violations by IHI and future conduct of the company. Other states have required certain percentages of IHI's revenue, up to 60 percent, to come from the sale of products. Wilburn said a similar deal could be part of an agreement in Missouri. "You've got to sell the products," he said.

As part of Judge Story's order, the receiver was dismissed, but a monitor was named to oversee the company's compliance with his order. Among other things, Story required IHI to communicate to all its representatives within 30 days the details of the order and a plan to make future practices comply with securities regulations.

Wilburn said Missouri regulators' investigation should conclude by April 17, followed by an announcement of action and any agreement with IHI.

INSET CAPTION:

The complaints we've been receiving are from people who were trying to sell the products.'

Doug Wilburn

Mo. secretary of state's office [[In-content Ad]]

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