TOPEKA, Kan. — An investigator for Oregon's corporation commission testified Wednesday in a hearing by the Kansas securities commissioner about Oregon's investigation into operations of Culture Farms Inc. and other companies involved in production of Cleopatra's Secret cosmetics.
Culture Farms, of Lawrence, Kan., is one of several interrelated companies involved in the business of producing Cleopatra's Secret cosmetics, made from milk-based bacterial cultures grown at home by private individuals.
In addition to official inquiries in Kansas and Oregon, the companies are also being investigated by California authorities, after the firms sold culture growing kits as investments to scores of Orange County consumers.
Kansas Securities Commissioner John Wurth is attempting to stop the firms from doing business in his state, contending they have a pyramid sales scheme that makes its money from sale of culture-growing kits, rather than sale of cosmetics.
Jim Hendry, a securities examiner for the Oregon agency, testified Wednesday that he and Emily Simon, an Oregon assistant attorney general, met April 15 in Los Angeles with Terry Taylor, president of Culture Farms, and Paul Stemm of Irvine, a lawyer who helped develop agreements between several companies involved in the case.
Desist Orders Served
Hendry said that after he and Simon questioned the two men in the presence of their lawyers, he served Oregon cease-and-desist orders on Taylor and Stemm. In addition, he said Simon attempted to serve a similar order on Roland Nocera, president of Activator Supply Co., a related firm, but was prevented from catching Nocera.
In a tale that involved firms from Liechtenstein, South Africa and Netherlands Antilles, Hendry related to the administrative hearing the information Taylor and Stemm told him about development of the culture-growing business in the United States. He said they also talked about agreements between companies.
Robert Bretz, one of the battery of lawyers serving the companies and individuals in the case, attacked Hendry's credibility and noted that Hendry completed questioning of Taylor and Stemm before he told them he was carrying a cease-and-desist order in his briefcase.
The appearance by Hendry prompted lawyers for Culture Farms and other parties to request a subpoena of investigative records of the State of Oregon. An attorney for the state securities commissioner, Craig Stancliffe, opposed the request, calling it a "fishing expedition" to see what the Oregon investigation uncovered.
Hearing examiner Chuck Briscoe rejected the subpoena request, although Hendry was to remain available for questioning through Thursday morning.
Denial of Information
In calling for a subpoena of Oregon documents, Bretz argued that Hendry was denying the lawyers and the hearing examiner any information he might have that could be beneficial to the companies' case.
Stancliffe said the lawyers obviously were attempting to get a look at investigative files from Oregon to anticipate what they will face in that state's case. Stancliffe added there is no way to force Oregon to submit to a Kansas subpoena.
"They've got a larger National Guard than we have," he said.
On another matter, Briscoe ruled that Stemm is not to be considered a party in the case, because it could not be shown that he ever received formal notice of the Kansas cease-and-desist action.
Briscoe earlier overruled a motion to dismiss the case, rejecting arguments that the administrative hearing was not begun within the required 15 days of the commissioner's issuance of the cease-and-desist order against Culture Farms.
Briscoe found a district court's temporary order preventing enforcement of the cease-and-desist order had also blocked any action by the commissioner to hold a hearing until the judge modified his ruling. For that reason, he said, the 15-day requirement did not begin to run until several days later.
The state is attempting to show that Culture Farms, Activator Supply and other firms actually act as a single entity in a fraudulent scheme. It also is attempting to show there is nothing special about the home-grown cultures used for producing Cleopatra's Secret, and that most of the cultures grown are not used in cosmetics but simply are recycled into new culture-growing kits and resold to growers.
Culture Farms provides the processed cultures to another firm that makes Cleopatra's Secret cosmetics. Similar cultures are being grown in at least 30 states and then sold to Culture Farms. At least six states have taken action to halt the business.
The commissioner's cease-and-desist order issued against Culture Farms in March was overturned by Shawnee County District Judge James Buchele, who said the commissioner's office should have conducted an evidentiary hearing first.
That hearing, which began April 24, resumed Wednesday at the Statehouse. The proceeding is to start up again Thursday morning with arguments on the admissibility of a stack of documents presented by the state.