Usana Health Sciences, which is the target of a Securities and Exchange Commission inquiry
relating to allegations by scamster-turned-fraud-buster Barry Minkow, said Grant Thornton had resigned as Usana’s auditor.
In a July 10 regulatory filing, the maker of personal care and weight management products said that Grant Thornton’s reports for the company’s 2005 and 2006 fiscal years “contained no adverse opinions, disclaimer of opinion, or qualification or modification as to uncertainty, audit scope or accounting principles.” Usana also said there were no disagreements between the company and the auditor on any accounting principles or practices, financial statement disclosure, or auditing scope or procedure.
However, Usana said that during Grant Thornton’s review of unaudited financial statements included in the March 2007 quarterly report there had been a disagreement between the company’s audit committee and the auditor about the scope of the procedures to be performed by the auditors, about the extent to which the audit committee should engage new, independent consultants to respond to accusations leveled against the company “by a third-party detractor.”
Usana did not identify the third party, but said that the company and its audit committee had deemed the third party’s claims unfounded and unwarranted.
The disagreements between Grant Thornton and Usana had led to further discussions between the audit committee and the auditor, the company said, “which were resolved to the satisfaction of GT, the company, and the audit committee.” The company also said that as a result of these discussions, the audit committee had engaged select advisers to provide advice on some of the allegations.
Usana said that Grant Thornton had completed its review of the first quarter 2007 financial statements, and that “the company has authorized GT to respond fully to any inquiries of a successor accountant.” However, Grant Thornton did not provide a reason for resigning the account.
In March, the SEC launched an informal inquiry based on allegations by Minkow, who now heads the Fraud Discovery Institute, but who is best known as the man behind the ZZZZ Best carpet-cleaning-company scandal in California in the 1980s. Then, he was convicted of 57 counts of fraud and conspiracy, and served nearly eight years in prison. Amid much national publicity, he committed himself to fighting fraud after his release.
His institute had delivered to regulators a 500-page report on Usana, calling the company a multilevel marketer with an untenable business model. According to the institute, no less than 85 percent of current distributors were losing money and no less than 74 percent failed within the first year, although these distributors were reported to account for 86 percent of the company’s multi-level marketing revenue. The institute also asserted that just 3 percent of distributors received 70 percent of company-paid commissions, which skewed the stated “average income figure” for Usana distributors.
In addition, the report described stock buybacks that were funded by Usana’s cash from operations. “That, in itself, is not wrong,” said Minkow in a statement, “but since the operating cash of the company to repurchase these shares came from the undisclosed attrition rates of collapsed distributors who had bought into the ‘True Wealth’ dream of Usana, but instead lost money and went into further debt, the Usana management literally funded stock buybacks that enriched themselves from those failed distributors who could least afford to lose money. That is wrong, that is evil.”
In a press release at the time, Usana called the statements “part of a coordinated public relations program financed by a paying client and from which Mr. Minkow will profit personally.” Usana pointed to a Wall Street Journal article that noted that Minkow “has bought ‘put’ options on Usana’s shares in a bet the price will fall.”
“Why would anybody take this guy seriously?” Usana spokesman Joseph Poulos told the Associated Press on Tuesday. “What is he an expert on? He isn’t a forensic accountant. He just committed one very large crime once.” Minkow, “is conducting a bear raid on this company,” Poulos added.
“It’s somewhat unusual for an auditor to resign without having a difference or an issue,” Ken Israel, administrator of the SEC’s Salt Lake regional office, told AP. The SEC routinely declines comment on pending investigations, however.