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Thursday - April 8, 2004

RALEIGH - Acting United States Attorney George E. B. Holding announced that JOHN DAVID BROTHERS, 40, of Frisco, Texas, a founder of Raleigh-based International Heritage, Inc. (IHI), pled guilty in federal court in Raleigh on Thursday, April 8, 2004, to one count of conspiracy to commit mail fraud, wire fraud, securities fraud, obstruction of justice, subornation of perjury, and to make false statements to the United States. BROTHERS, three other IHI senior executives, and the company's outside public accountant were originally indicted by a federal grand jury on October 16, 2002. (A superseding indictment was filed on March 20, 2003.) BROTHERS was the Chief Operating Officer and Compliance Officer of IHI, a member of the Board of Directors, and a leading sales recruiter and representative. The charges against BROTHERS focused on the fraudulent sale of private securities by IHI through the use of inaccurate financial statements for 1996, which concealed the true financial condition of IHI from investors.

IHI was incorporated in North Carolina in April 1995 by Stanley H. Van Etten, Larry G. Smith, and Claude William Savage as a multilevel marketing company purportedly offering exclusive brands of jewelry, recreational equipment, and fine unique collectibles. BROTHERS started with IHI in June 1995 as a sales representative and from November 1995 to April 1997, served as IHI's Director of Compliance. BROTHERS joined IHI's Board of Directors in January 1996 and became IHI's Chief Operating Officer in April 1997.

IHI employed what it referred to as a network marketing distribution system, which purportedly was a means of selling products without retail stores. The marketing was accomplished through a network of representatives, referred to by IHI as "independent retail sales representatives." Each sales representative could purchase one, three, or seven "business centers," which in effect were positions on the multi-level marketing structure, called by the Securities and Exchange Commission a "Pyramid," at a cost of $250.00 each. Thus, the costs to the sales representatives would be in increments of $250.00, $750.00, or $1,750.00, accordingly.

By the end of 1995, through recruitment and informational sales rallies led by various corporate officials and sales representatives and others throughout the country, IHI had recruited approximately 5,000 representatives and had "revenues" purported to be $5 million. By the end of 1996, IHI had 43,000 representatives, with "revenues" of approximately $50 million. By the end of 1997, IHI boasted 150,000 representatives throughout the United States and Canada, with over $100 million in "revenues." In each of its first three years (1995, 1996, and 1997), the vast majority of IHI's "revenue" was derived not from the sales of products, but through the sales of so called "business centers." IHI's central sales pitch, common to all pyramid schemes, was that participants could make large amounts of money from the geometric growth of their own sponsored sales representatives, referred to as "downline." IHI sales materials included in the sales kit stressed the importance and power of "geometric progression" and recruiting over retail sales of products. This meant that the amount of income that IHI sales representatives received would be increased if they, in turn, successfully recruited sales representatives under their names and sales structures.

The payout scheme, executive salaries, and other overhead costs of IHI caused the company to maintain a negative cash flow from its beginning in 1995 through its final demise in November 1998. IHI lost $1.9 million in 1995 and continued to lose money through 1996 and 1997 despite the large numbers of sales representatives recruited. By July 1997, IHI had accumulated losses of approximately $7.6 million and was financially incapable of fulfilling its commitments to its vendors or to its representatives. By December 1997, IHI's losses had grown to over $12 million. IHI accumulated operating losses in the approximate amount of $30 million during the 3-year period from April 1995 through November 1998.

On November 25, 1998, IHI filed for Chapter 7 bankruptcy protection in the Eastern District of North Carolina, and an attorney was appointed as the bankruptcy trustee.

Trials are pending for the other two defendants named in the March 20, 2003 indictment, including IHI Chief Executive Officer, President, and founding Director, Stanley H. Van Etten, 42, of Lake Drive, Raleigh, N. C.; and the company's outside accountant, Davin Walter Brown, 49, of Tyson Street, Raleigh, N. C. BROTHERS is the fourth defendant associated with IHI to plead guilty. On January 21, 2003, Larry G. Smith, 59, of Greenville, S. C., who was a founding director, a member of the board of directors, and a leading sales representative of IHI, pled guilty to one count of conspiracy to commit mail fraud, wire fraud, securities fraud, and to make false statements to the United States. On October 20, 2003, Georgina Mollick, 39, of Raleigh, N. C., who served as counsel to IHI and later Vice-President for legal affairs, pled guilty to a criminal information charging her with misprision of a felony. Claude William Savage, 66, who was also a founder, a member of the board of directors, and a leading sales representative of IHI, pled guilty in federal court in Raleigh on March 23, 2004, to a one-count criminal information charging him with mail fraud. Smith, Mollick, Savage, and BROTHERS are awaiting sentencing.

Investigation of the case was conducted by the Federal Bureau of Investigation and the Internal Revenue Service-Criminal Investigation.

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