Lawyers: Maxam Nutraceutics "On the Brink of Extinction"

OREGON Jim Cole has asked a federal judge in two civil forfeiture cases to release funds to keep his businesses including the dietary supplement manufacturer Maxam Nutraceutics afloat.

In a motion filed last month with the federal district court, Cole's lawyers wrote that Hood River, Oregon-based Maxam and an exercise machine company TurboSonic "are on the brink of extinction."

Prosecutors with the U.S. Attorney's Office in Oregon are opposed to the release of any funds, Cole's lawyers disclosed recently in a court document.

Cole is moving for the release of $25,000 each month to pay operating expenses, or alternatively, a hearing to determine what evidence the federal government has to substantiate its allegations of mail and wire fraud.

Cole's lawyers initially asked the court to return $30,000 per month for operating expenses. But after a "minute order" was released it appears the judge asked the parties to confer and try to narrow their dispute   the attorneys filed another motion asking for $25,000 per month. Prosecutors have yet to respond to the most recent motion.

In July, the court granted prosecutors leave to put the civil cases on hold for six months pending the resolution of a criminal investigation involving Cole and tax issues.

Maxam Out of Money  

Four months later, Cole revealed Maxam and TurboSonic are in dire straights: combined monthly revenues at the companies ($15,000) are less than half of the monthly costs ($38,630). More than a year ago, federal authorities seized $520,000 in gold from Cole's home and $144,000 in cash from several bank accounts.

"The seizure has had a devastating effect on Maxam," Cole declared in a court filing. "Maxam's books reflect that in the twelve months before the first seizure in April, 2011, its profit was $295,436.04. In the 13 months since the second seizure in September, 2011, Maxam's loss has been $171,043.94."

Michael Cox and John Markham, Cole's lawyers, acknowledged in a motion that neither a return of the funds nor an evidentiary hearing are contemplated under the relevant federal forfeiture statute. But they stated the law is subject to the U.S. Constitution's Due Process Clause.

"The government's actions will cause irreparable harm of the kind the Due Process Clause is meant to prevent if such a hearing is not allowed by this Court before Claimant's businesses are shuttered," the lawyers wrote.

Cole has said he has been financing the businesses through his savings and selling products at a discount. Those resources have been completed tapped.

"I no longer have the savings to pay out and we no longer have the inventory to sell at a discount to raise cash," he declared in a court filing.

Prosecutors: Return of Property Unwarranted

Cole must establish "hardship" in order to seek a return of property, and currency and other monetary instruments are exempt from the Civil Asset Forfeiture Reform Act of 2000, prosecutors responded in a court filing.

The government also declared an evidentiary hearing would be premature at this stage of the litigation.

"There is no mechanism under the due process clause or elsewhere for requiring the government to make a post-probable cause, pre-trial showing of the current state of its evidence, or to return tainted currency to a claimant," Assistant U.S. Attorney Katherine Lorenz wrote. "Claimants' only recourse at this point is to contest the forfeiture case on the merits at trial, which can only take place once the stay has been lifted and the parties have completed discovery."

Cole Cites Weak Case

The problems for Cole likely started in October 2010 when FDA advised him Maxam's marketing violated federal law because its products labeling was "intended to affect the structure or function of the body of man or other animals and/or intended to cure, mitigate, treat, or prevent disease conditions."

Only government-approved drugs can be marketed to treat diseases, and regulators were alarmed by glowing reviews that described the benefits of Maxam's dietary supplements. Cole has said 47 government agents raided his home and businesses even though he removed the testimonials within the government-allotted time.

In a Nov. 7 memorandum in support of their request for a return of funds or a hearing, Cole's lawyers maintained the government has a feeble case and cannot prove the companies "knowingly" made false statements, which is an element of fraud. An affidavit from a government agent "never asserts that Claimants knew what they were saying about their products was false", according to the memo.

The lawyers also asserted a former Maxam employee who prompted the government probe "admitted in her deposition that she had no specific evidence that anyone employed by Claimants acted fraudulently."

The government responded that its case isn't weak, as demonstrated by the fact that two judges "reviewed the evidence and concluded such evidence is sufficient to proceed with these forfeiture cases."

"Claimants should not be permitted to make an end run around this Court's stay order through this motion," Lorenz wrote, "nor should they be permitted to bypass discovery and go straight to a 'hearing' that would essentially function as a premature trial."

Fighting over Gold

On April 7, 2011, Cole's life changed for the worse. That is when dozens of agents searched his home and businesses.

Among the assets the government seized: $520,000 in gold bars from his home safe. The price of gold has substantially increased since the seizure, and Cole maintains the gold is used in the manufacturing of Maxam's products. Prosecutors, however, argue there is no legal basis to return the gold at this time.

A dietary supplement manufacturer must list all ingredients in foods or dietary supplements, and gold isn't listed in any of the defendants' products or mentioned as an ingredient in the products that are advertised for sale, according to the government.

"Thus, if Claimants were, or are, putting gold into these products, all of the products would be misbranded," Lorenz wrote in the government's opposition to Cole's motion. "More important, even if the gold were returned to Claimants today and they changed the labeling to include gold as an ingredient, they could not 'resume' using the gold for its purported purpose until and unless they are otherwise in compliance with FDA statutory and regulatory requirements concerning current good manufacturing practices, registration and listing of establishments and products, and substantiation of claims, among other issues."