Fraud Discovery Institute's Analysis of USANA

[michaelwebsterlaw]

Now this is a good read,
http://www.frauddiscovery.net/us/UsanaFinal.pdf

[wserra]

Barry Minkow (for those who don't know) is a convicted fraudster, a relentless self-promoter and a verbose name-dropper. That said, after separating the wheat from the chaff, he also comes up with good stuff.

Barry - at one-third the length, and minus the not-so-veiled references as to how good you are, it would be a terrific report.

[madinsacramento]

So here we have a trifecta:

Evidence of violation of the FTC laws concerning MLMs
Evidence of violation of the SEC laws concerning securities and stock fraud and
Evidence of tax evasion and violation of IRS laws

Painstakingly researched, documented, and submitted. Since I have no doubt that at least some of the principals are Republican party contributors, lets just see how fast the wheels of justice turn on this one . . .

And these guys HAVE money . . .

[madinsacramento]

Retailiation:

http://news.moneycentral.msn.com/ticker ... ID=6623187

[wserra]

Interesting. It will be worth following the progress of this suit. USANA's lawyer - Parr Waddoups of Salt Lake City - is a respectable firm, and they have just moved to bring in pro haec vice three lawyers from Shugart Thomson, another respectable (and larger) firm.

I've put up a copy of the complaint for anyone who wishes to read it. They claim that Minkow is shorting USANA's (publicly-traded) stock, a hubristic (or just plain dumbass) move on his part which illustrates my misgivings about Minkow. He had to know he was inviting a defamation suit - why give them a personal profit motive to pin on him? Yes, I know, truth is always a defense, but profiting from it sure gives up the moral high ground.

The first fight is likely to be whether venue is properly laid in Utah. USANA filed under diversity jurisdiction, so Utah venue requires that Minkow be subject to Utah state long-arm jurisdiction. They allege such jurisdiction, but some of the grounds (in particular, that he bought USANA products) are silly. Others (that he went there to attend a conference, for example) are less silly. We'll see.

It seems to me that the merits of the alleged defamation would have been a hard sell had Minkow not shorted USANA stock. They take great issue with his lab tests, claiming (for example) that they don't show what he says they show. They huff and puff about how, while Minkow claims that USANA president David Wentz made contradictory statements (about the effect of the proposed FTC "biz opp" rule) to the FTC and in SEC filings, the SEC filings were actually made over the signature of company CEO Myron Wentz, David's father. Whoop-tee-doo, especially since they do not claim that the statments were not in fact contradictory. They claim that Minkow's statements about their business model - large majority of sales to distributors, only way to expand being to attract more distributors, huge attrition rates, no monitoring of their own guidelines for distributors, the stuff we routinesly point out here - is all false and he knows it. Period.

While complaints are frequently amended as litigation progresses, what this one leaves out is as interesting as what it contains. As we frequently write here, MLM products are hugely more expensive than their non-MLM equivalents, due to the necessity of paying the upline. Minkow does the same sort of comparisons that we do on a larger scale, and makes a convincing case as to USANA. They don't even mention it.

This one will be interesting to follow.

[michaelwebsterlaw]

The complaint appears to have been drafted in haste.


1. The complaint does not contain any injunctive relief which would require the Fraud Discovery Institute to removing the offending material from its website.

2. The plaintiff is only USANA, which makes it hard to show defamation damages.

3. USANA complains of three different "defamations" regarding FDI's testing of three of USANA's products by an independent lab. USANA disagrees with the interpretation of the lab's results, but has not added the lab as a defendant, even though the lab is the source of the report.

4. The complaint does not address, what I consider a major problem, the different representations made to the SEC and FTC concerning FTC's new proposed disclosure requirements for network marketers. Minkow et. al. are saying that USANA has failed to disclose how its business model really works in its public documents. As evidence, they point to USANA's representations to the FTC in which USANA says its business model will be "impossible" if forced to disclose its rates of attrition. Yet, in their public documents to the SEC, USANA states that the FTC new disclosure will entail a possible change in their pre-sale disclosure. (USANA correctly points out that two different company executives made these representations, but since neither of them are plaintiffs the confusion between their identities is not material.) USANA is saying two different things to the SEC and to the FTC. Which is true? Harm or no harm?

5. Finally, although the complaint may be amended, USANA's response to the FDI's 8 Red Flags is to simply deny them. There is no attempt to justify or even explain away the problems raised.

[wserra]

According to The Street, the SEC has begun an informal inquiry as to USANA. To be fair, these informal inquiries frequently do not result in regulatory action, but do make potential investors queasy.

As for people who would pay USANA for the privilege of selling its products - well, they probably don't know what the SEC is.

[michaelwebsterlaw]

http://www.prnewswire.com/cgi-bin/stori ... 713&EDATE=

Dreier LLP (http://www.dreierllp.com) today announced that a class action lawsuit was commenced in the United States
District Court for the District of Utah, on behalf of purchasers of the common stock of USANA Health Sciences, Inc. ("USANA" or the "Company") (Nasdaq: USNA) during the period July 18, 2006 through March 14, 2007, inclusive (the "Class Period"). The complaint alleges violations of the federal securities laws, including Section 10(b) of the Securities Exchange Act of 1934.

[soapboxmom]

http://youtube.com/watch?v=nUw-UbtORxc

Barry is even better in front of a camara!

Soapboxmom

[wserra]

Minkow's out-of-court response to USANA's defamation suit. Definitely worth reading:

http://www.frauddiscovery.net/us/usanar ... 0final.pdf

[wserra]

And Barry goes in front of the camera again, this time to do one of the things we do here: show how much more MLM products cost than equivalent stuff, marketed traditionally.

Say what you will about Minkow, he is entertaining (and right).

[wserra]

I gotta admit that Minkow is doing a really good job showing exactly why people whose own affairs really don't stand up to close scrutiny should think many times about suing for defamation.

This stuff is fun reading, and applies to every MLM out there. It's also a good example of why MLMs shouldn't be publicly-held - the required disclosures give away far too much about how they are all ripoffs. I especially like USANA president David Wentz' pathetic "explanation" about the average distributor's dismal earnings numbers: most of his people are just looking to pay for their own use of USANA products. Gee, Dave, doesn't your web site tout this "Incredible Opportunity to Experience Unlimited Earning Potential"?

Keep it up, Barry. (BTW, when are you going to answer the Utah complaint?)

[wserra]

Another (undated but new) report from Barry & Co., this time on the various USANA contradictions.

Why do you think MLMs panicked at the proposed new FTC bizop regulations? It would make the sort of reaming Barry is giving USANA much easier to put together. Coming up on a year since the end of the public comment period for those regs, BTW. Maybe one day we'll hear from the FTC.

Keep it up, Barry. But when are you gonna answer the Utah complaint?

[Shakespearegirl]

what is up with the FTC? Any movement on the proposed rule yet?

[wserra]

what is up with the FTC? Any movement on the proposed rule yet?

Those are two questions, SG. Answers:

(1) Why, just read their motto: they are "protecting America's consumers". The problem is that they do it about once per year. The Shrub administration's policy of putting the foxes in charge of the chicken coops hasn't helped.

(2) None that I know of.

[Shakespearegirl]

crap.

I just can't believe how LONG it takes for them to do anything. I mean, it's been over a year since the MLM companies had their huge "get out the vote" campaign to spam the FTC with a million form letters.

what do you mean by "foxes in charge of the chickens"? Are the people at the FTC being bribed by the MLMs ?

this is so frustrating to watch.

[wserra]

what do you mean by "foxes in charge of the chickens"? Are the people at the FTC being bribed by the MLMs ?

Sorry for the delay in responding. I've been spending far too much time here lately.

No, it isn't as blatant as bribes. It doesn't need to be. To an extent I haven't even seen approached before, this administration has politicized regulatory agencies. One after another, the supposedly non-partisan agencies are headed by partisans - who, once they leave, will simply return to their roots - the industries they now supposedly regulate. Yes, I know, everything in Washington is political, but the extent to which Bush carries it is unbelievable - there isn't even the appearance of being fair. And that's not even addressing the unlawful overt partisanship (may require free login).

For example, the agency at issue here, the FTC: Its chairman since 2004 is Deborah Platt Majoras. Before Bush appointed her to head the FTC, she was a partner at Jones Day - one of the world's biggest (2200 lawyers) and best-connected firms - in their anti-trust division. In other words, a large part of what she did was defend major companies against the sort of charges the FTC (and SEC) brings. While Jones Day has lots of clients, amongst them is Quixtar/Amway. When she leaves the FTC, where do you think she'll go? The idea that she would accept a bribe is wildly implausible - but who needs bribes? After all, who are her friends?

The most egregious example was Bush's nominee to head the Consumer Products Safety Commission (CPSC), the nation's chief watchdog against hazardous products. For thirteen years, Michael Baroody was the Executive VP of the National Association of Manufacturers, the giant DC lobby against "overregulation" - their euphemism for holding manufacturers accountable for their products. The hue and cry was enough to sink the nomination, but that was just the tip of the iceberg.

So don't be surprised at the delay.

[wserra]

Well, it appears that USANA agrees with what I posted four months ago that "the merits of the alleged defamation would have been a hard sell had Minkow not shorted USANA stock".

USANA just filed an amended complaint which, IMHO, is much better written and much more focused than the original. Instead of just ranting about how unfairly Minkow was treating poor old USANA, it attributes the entire action to the oldest and most jury-friendly motive there is - money. It concentrates on the details of Minkow shorting USANA stock, and mentions certain others (identified for the moment only as John Does) doing the same. It drops many of the silly things Michael Webster and I commented on.

I think Minkow may have a problem here. Too bad, because if I had to choose between USANA and Minkow, I'd take Minkow every time.

And he still hasn't answered.

[Shakespearegirl]

this chaps my hide for more than one reason.

I hate to see an MLM have a legitimate complaint LOL

There's been some other weird issues involving USANA and Barry. Barry hired a CPA to do an "investigation" into USANA, and this CPA wrote a silly report that he posted on his site. You can read it here:
http://www.frauddiscovery.net/UsanaForensic.pdf

The problem with this is that the CPA in question is accused of being an internet stalker, lying about her own credentials, among other things. There's a whole website devoted to exposing her, and they post emails and other electronic evidence from her...it's not simply hearsay.

Plus the fact that the report itself could have been written by anyone and didn't include much in the way of actual investigation.

This CPA was then blasting this USANA "investigation" all over her own website, and it appears that all of this stuff is just a vehicle for self-promotion and hyping of her own business...

I hate to even type this, since I have absolutely no love for USANA or any other MLM. I just wish there were more Soapboxmoms out there, and less of these self-promoters with agendas - it would make the critics more believable, if you know what I mean.

[wserra]

As long as we're posting about USANA - the bad press from Minkow, the Utah lawsuit, the plunging stock price, the informal SEC investigation - here's one other tidbit.

In their most recent (7-10-07) 8-k, USANA told the SEC that everything was honky-dory between it and its auditor, Grant Thornton. Basically. There's just this one little thing: they "disagreed as to the scope of the procedures to be performed by the auditors and disagreed as to the extent to which the Audit Committee should engage new, independent consultants to respond to what the Company and its Audit Committee deemed to be unfounded and unwarranted accusations leveled against the Company by a third-party detractor". As a result, Grant Thornton packed up and jumped ship. The 8-k doesn't name the "third-party detractor", but I think we know who it might be.

Let's think about this for a second. The disagreement was over "the scope of the procedures to be performed by the auditors". Now, that could be one of two things: Grant Thornton thought they should go into more than USANA wanted them to, or Grant Thornton thought they should go into less than USANA wanted them to. Since it is a little hard to picture an auditor declining to examine an issue that the company wishes them to examine, I think we can safely assume that it didn't happen that way.

Recall that one of the things Minkow accused USANA of doing was using operating cash for stock buybacks - in effect using the payments of the large majority of distributors who will lose money to prop up the stock price for the big guys. Could an auditor be interested in that?

Grant Thornton gave no reason for quitting. Draw your own conclusions.

And then there's Zac Bisonnette of BloggingStocks, who reports on how a list of USANA machers may not have quite the credentials they claim.

Yet more examples of wserra's Rule 1 for scamming MLMs: don't go public.