FTC on the Demise of USANA
Tracy Coenen has an excellent analysis of the demise of Usana from a terrific article in the San Diego Reader. Do read the entire article, it is very interesting.
But, it is worth reviewing her facts and allegations in light of the new proposed business opportunity rule, still under wraps at the FTC.
Had the rule been in place what would have changed, assuming Coenen's facts are correct?
Here is her summary:
1. Companies like Usana make money by recruiting new salespeople who pay a fee to become a distributor and then often buy products in order to 'qualify' for commissions on people they bring into the pyramid.
2. Little actual retailing of products occurs.
3. 60 percent of active Usana distributors do not earn commissions and 70 percent of commissions go to 3 percent of the salespeople.
4. More than 45 percent of Usana's stock is held on the Isle of Man tax haven by Myron Wentz, company founder, and is in turn controlled out of another tax/secrecy haven, Liechtenstein.
5. The issuance of the report sparked stories in the Wall Street Journal and Forbes.com.
6. The SEC started an 'informal' (for now) inquiry into Usana.
7. Reporters confirmed an FBI investigation into Usana, but the company denies knowledge of it.
8. Usana asked law enforcement to investigate Minkow, but they declined.
9. Usana officials including the CFO, a board member, and members of the 'Medical Advisory Board' falsified their credentials in SEC filings and other materials made public.
10. Usana's long-time auditors, Grant Thornton, resigned after a disagreement about the scope of review procedures on quarterly financial statements.
11. Usana's 2nd quarter SEC filings are delinquent (i.e. They filed financial statement that were unreviewed.)
12. Morningstar reported: 'We are still wary of Usana's management team.'
13. Usana accuses Barry Minkow of lying to profit from a drop in Usana’s stock price, but the truth is that he issued a fair report with evidence to back up the allegations, and any profit Barry might make on the stock won’t even come close to covering the cost of the investigation. And his stock investment was disclosed from the start. Barry did not violate any laws with this stock bet.
14. Three shareholder suits are pending against Usana.
15. One distributor class action suit is pending against Usana.
Here is my brief take on it. The new disclosure requirements would have forced USANA to disclose the lawsuits in 14 and 15, but perhaps not the investigations in 6 and 7.
Items 1, 2 and 3 would have been disclosed. But I remain sanguine that this would amount to much: Arbonne discloses a similar earnings claims, and it still has representatives.
Likely the only result of the new business opportunity rule for USANA would be the enforcement of it against one of the larger distributors who failed to file the prescribed document arguing that they were not making an earnings claim.
It will be interesting to see how, if ever, the FTC choses to employ, when it is finally settled into law, the new business opportunity rule.
