Risk & Compliance

”Fraud Fighter” at Odds with Usana

Barry Minkow, infamous for the 1980s ZZZZ Best scandal, alleges that Usana Health Sciences has an ''untenable'' business model; Usana alleges defam...
Stephen TaubMarch 20, 2007

Usana Health Sciences disclosed that the Securities and Exchange Commission has launched an informal inquiry following allegations by Barry Minkow, a felon who now heads the Fraud Discovery Institute.

Usana, which makes personal care and weight management products, stated that it is cooperating fully with the SEC and disclosing the inquiry “due to the highly public nature of Mr. Minkow’s recent allegations, which it believes to be false and defamatory.”

Minkow attained notoriety in the 1980s when he was convicted of 57 counts of fraud and conspiracy related to his carpet-cleaning business, ZZZZ Best. He served nearly eight years in prison and, upon his release, was ordered to “fight corporate fraud.”

The Fraud Discovery Institute recently delivered a 500-page report on Usana, which it described as a multilevel marketer with an untenable business model, to the SEC, FBI, and IRS. According to the institute, no less than 85 percent of current distributors are losing money and no less than 74 percent fail within the first year, yet they account for 86 percent of the company’s multi-level marketing revenue. The institute also asserted that just 3 percent of distributors receive 70 percent of company-paid commissions, which skews the stated “average income figure” for Usana distributors.

In addition, the report described stock buybacks 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, Usana asserted that the statements “are part of a coordinated public relations program financed by a paying client and from which Mr. Minkow will profit personally.” Usana pointed to a recent Wall Street Journal article, which noted that Minkow “has bought ‘put’ options on Usana’s shares in a bet the price will fall.”

“Mr. Minkow admits that he has been paid to conduct his ‘investigation’ against Usana,” the company stated. “Further, he has engaged a public relations firm to propagate his false and misleading statements about Usana to the media.”

Usana has filed a lawsuit in U.S. District Court in Salt Lake City against Minkow and the institute, alleging defamation. Separately, the company announced that its legal counsel has formally requested that the SEC investigate Minkow’s short or other derivative positions in its stock, as well as his “false public statements,” which according to Usana constitutes a scheme to profit from driving down the company’s stock.

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