A Lanham-based company that spread its investment gospel by word of mouth and recruited investors at meetings likened to religious revivals has been accused of fraud by the federal Securities and Exchange Commission.
In a complaint unsealed yesterday in U.S. District Court in Washington, the SEC alleged that the International Loan Network Inc. (ILN) was nothing more than a pyramid scheme in which the primary source of income was continued recruitment of new members.
At the SEC's request, the court granted a restraining order prohibiting ILN from accepting additional investor funds and freezing the assets of the company and its principal officers, Melvin J. Ford, the president, and Odell Mundey, vice president.
The action came just days after the SEC obtained details of a Maryland investigation of ILN that has been going on for more than a year -- but has been hindered, according to state Securities Commissioner Ellyn L. Brown, by weaknesses in the state law governing pyramid schemes.
"The Maryland Division of Securities is absolutely delighted that the SEC has chosen to move on this matter. We have been attempting to catch their interest on International Loan Network for more than a year," Ms. Brown said, adding that "we believe that the fruits of our investigation are the basis of the SEC action."
ILN's seminars have been staged in dozens of cities, including one at Baltimore's Marriott Hotel run by Mr. Ford on Saturday that attracted several hundred people.
In a statement accompanying the federal complaint, Daniel H. Rubenstein, a senior attorney for the SEC, wrote that "ILN directs its marketing efforts toward investors of limited economic means and little, if any, financial sophistication."
According to the SEC, as many as 40,000 people nationwide have invested in ILN, which describes itself as "a membership organization designed the assist its members in improving their financial status through a variety of benefits and services" with a goal of "financial independence" for them.
But questions raised by investigators have focused on the actual value of the benefits that accrue to the investors, who join at various membership levels defined by the amount of cash they )) put in -- ranging from $100 to $25,000.
The benefits were to include such things as financial and estate planning -- which a former ILN employee contended the company was incapable of providing, the SEC said. It said that even grocery coupons were offered to members.
There were a variety of changing "income opportunities," the SEC said, ranging from "capital fund bonuses" for bringing in new members to offers of investment in real estate equity or the purchase of properties being sold for delinquent taxes.
The SEC said the company offered fivefold and tenfold returns on investments but told investors seeking cash rather than "property value" that they had to recruit new members in order to receive the money.
In seeking an immediate freeze on company and personal assets, the SEC said it learned on Tuesday that ILN had used a series of wire transfers last month to move about $300,000 from a bank account in Laurel to another account, at a bank in the Bahamas, in the name of Worldwide Properties Inc.
The SEC noted that the transfers took place "around the same time" that ILN activities were being investigated by the Washington Post, which published a lengthy article on its pep-rally meetings geared toward ethnic and minority investors.
ILN transferred nearly $2 million more in April "to other accounts presently unknown," the SEC said.
William R. McLucas, director of the SEC's enforcement division, declined to discuss last night when the SEC investigation began or how it was conducted. "Everything in the commission's complaint and what we've found in making sure [it] is well-founded is based on the commission's work," Mr. McLucas said.
But Scott E. Stapf, investor-education adviser for the North American Securities Administrators Association, said that at least six states looked into or took action against ILN, while the federal agency appeared to do nothing until the news media took an interest in the company's activities. "The impression we've been given is that it required a call from '60 Minutes' before the SEC decided to take action in this case," Mr. Stapf said. "Several states have called this case to the attention of the SEC. Maryland in particular has been pressing the SEC to look into this matter."
According to Mr. Stapf, whose organization encompasses the securities commissioners of all 50 states, Maryland invested a year and a half of effort looking into ILN before receiving an SEC request to turn over its files on the case last Thursday.
Taking care not to criticize the SEC staff's commitment, Mr. Stapf said there has been a "chill" between state regulators and the federal agency's chairman, Richard C. Breeden, "who has made no secret of the fact he would like to see state securities commissioners put out of work."