| Wall Street Journal Article Slams Usana Fraud Discovery Institute Alleges Securities Violations March 15th, 2007
The Wall Street Journal today published a summary of an 86 page report by the Fraud Discovery Institute (FDI) which alleges that the public company Usana Health Sciences (NASDAQ:USNA) is guilty of “multiple alleged misrepresentations, material non-disclosure and an untenable business model.”
The FDI is directed by Barry Minkow, who spent almost eight years in prison after being convicted on 57 counts of fraud and conspiracy in the 1980s. He now assists the SEC in uncovering securities fraud.
According to Minkow, Usana is in violation of SEC disclosure law because they do not disclose that:
1. Usana’s products are “hopelessly overpriced” and only 14% of company revenue comes from retail sales;
2. No less than 85% of current distributors are losing money, and at least 74% will fail within their fist year of business;
3. Only 3% of Usana distributors receive 70% of all commissions and bonuses;
4. Usana Founder and Chairman Dr. Myron Wentz, the majority stock holder, renounced his United States citizenship and “misrepresents the location of the entity that owns 46% of Usana stock” – which, allegedly, is the tax-haven country of Liechtenstein.
5. Wall Street analysts who follow Usana continue to rate the company highly and recommend their stock only because they, like Usana reps and investors, are failing to understand the “below the iceberg” effects of Usana’s financial data;
6. Usana, as a multilevel marketing company, has an “untenable” (so poorly designed as to be indefensible) business model which is based on the perpetual turnover of failed distributors. Thus, Usana is destined to collapse due to market saturation.
According to the FDI report, if Usana distributors were adequately informed of these issues “Usana’s ability to attract new distributors would be materially adversely effected, which appears to be why they have chosen not to disclose any of these facts.”
To review the entire FDI report, go to: http://www.frauddiscovery.net/usanapr.html
Before the work day was even over Usana had filed a defamation law suit against Barry Minkow and the FDI. Usana alleges that Mr. Minkow's statements are “part of a coordinated public relations program financed by a paying client and from which Mr. Minkow will profit personally.” According to The Wall Street Journal article, Mr. Minkow "...has bought 'put' options on Usana's shares” (which an investor does when they expect the stock price will fall). Usana claims Minkow has admitted to being paid to conduct his "investigation" against Usana. They go on to state, "Usana believes this is a campaign to manipulate Usana's stock price.”
To review the entire Usana response, go to: http://biz.yahoo.com/bw/070315/20070315006293.html?.v=1 Commentary:
I’m still poring through Mr. Minkow’s cringe-worthy anti-MLM manifesto (and it is, indeed, anti-MLM, not just anti-Usana), but from nothing more than the two page press release issued by the FDI I could tell that this diatribe was going to be little more than a regurgitation of the same, tired, completely discounted attacks made by Anti-MLM Zealots Robert Fitzpatrick and Jon Taylor. And so far it is. And there’s a good reason for it. Fitzpatrick is the FDI’s “retained expert” (and introduced as “widely recognized as the leading expert on multilevel marketing”) and is referenced ten times within the FDI report. Jon Taylor’s contribution to this report is described just as ironically as being “significant due to his ability to interview past and present Usana distributors to formulate more accurate conclusions.”
To appreciate the irony of these descriptions, please read the pertinent sections of the “Anti-MLM Zealot” article series at MarketWaveInc.com.
Minkow does disclose that the FDI is a for-profit business. He sells, among other things, a DVD called “Frauds Gone Wild” (a la “Girls Gone Wild”). He claims he has never charged any victims of fraud for his services, which, before this egregious misstep, are otherwise commendable. While his motives here may be sincere (a jury will decide), he certainly got himself and his products a lot of free publicity with his Usana report, and Usana’s stock, which has risen over 1,600% since early 2002, fell over 15% today. Someone with “Put” options on Usana stock stands to make a bundle. Perhaps someone who was ordered to pay $26 million in restitution to his own fraud victims?
There’s also plenty of other suspects when it comes to who would like to see Usana’s stock price fall. A relatively high 12.9% of all Usana stock is shorted (another investment technique where one makes money by a stock price dropping).
Interesting side note: Usana’s lead attorney in their defamation suit is Mr. D.J. Poyfair. I’ve worked on a case with Mr. Poyfair a few years ago as an MLM expert witness. He’s the prosecuting attorney that put Mike Tyson in prison. His nickname in legal circles is “The Terminator”. Usana isn’t fooling around.
In direct response to each of the six points listed above:
1. In Fitzpatrick’s anti-MLM works he often times inadvertently debunks his own arguments. Minkow’s commentary regarding Usana’s overpriced products has Fitzpatrick written all over it. Let’s assume the 14% retailed rate is accurate (how anyone would know the volume of products resold by distributors, or the number of customers who enrolled as distributors just to purchase products at a lower price, is never revealed by any anti-MLM zealot, nor is it here). This would then mean that Usana moved over $62 million of their “hopelessly overpriced” products last year at retail! And this isn’t even including those who enrolled just to pay a lower price, which surely is the majority of their regular customers.
Two of the “leading experts” in MLM, and one of the “foremost experts” in fraud investigation, all somehow seemed to have missed this. Again.
2. To know that 85% of Usana reps are losing money would require a knowledge of all Usana rep’s expenses. No mention is made as to how this data was miraculously derived. To know that 74% will fail would require knowledge of every Usana rep’s income goal (what, exactly, is Minkow’s definition of “failed”?). No mention is made as to how this data was derived, either.
3. To know that only 3% of all Usana reps earn 70% of the commissions paid begs the question (assuming it’s even true), How did Minkow discover this if Usana does not reveal the pertinent data? Did he sneak into their accountant’s office and microfilm their books? Did he hack their computer? Or, did he calculate this from data that, per SEC regulations, Usana publicly disclosed!
4. I am not knowledgeable enough in securities law to comment on the ramifications of this allegation (see the Usana response). I am sure of one thing, though: It has absolutely nothing to do with the MLM business model being “untenable”.
5. As I’ve rhetorically asked here many times, Isn’t it fascinating how MLM is “backed by an ex-president” and “defended by top law firms”, which FitzPatrick acknowledged in his book. He claims MLM even has its own caucus in Congress. Inc. Magazine, Forbes, Entrepreneur, Success Magazine, and others, have all published positive articles about this industry. MLM is recognized as a legal business model by all fifty Attorneys General, the FTC, the vast majority of the House and Senate, and many state and federal courts, and has been for decades – not to mention the SEC and the several hundred thousand investors in MLM companies. Yet, FitzPatrick, and now Minkow it appears, believes they’re right, and all of the above are wrong! The majority of the three largest U.S. based MLM company’s sales are outside the U.S. - so apparently we're not only fooling Usana stock analysts, we’ve bamboozled the citizens, courts, and regulators in over 60 other country too!
6. It’s even more fascinating that there are still people in this country that believe the Earth is flat, the Moon landing was faked, and after 71 years of MLM existence, with companies like Usana which has had record growth for 18 consecutive quarters after being in business for almost ten years, all MLM companies must die an inevitable death of saturation.
Mr. Minkow notes that he just started looking into the MLM business in 2003. It shows.
I’m sure there will be much more to come on this one. Stay tuned.
Len Clements
MarketWave, Inc.
P.S. For the record, I have never owned Usana stock nor have I ever been a distributor for Usana.
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