10 Red Flags - Is USANA A Pyramid Scam?
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For more stories on USANA, click here.
Barry Minkow, and his team at Fraud Discovery, published a devastating critique claiming that USANA was an illegal pyramid scheme
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The article is no longer at Minkow's, as the result of his settlemement with USANA.
Candid disclosure, I wrote an flattering article about the Fraud Discovery Institutes's due diligence, and in return Barry Minkow promised to buy me a beer if I was ever in San Diego, which is also the home of the American Association of Franchisees and Dealers.
Here is my summary of the report, but I urge readers to read the entire report and all 20 addendums and the lab report. There are 8 red flags, and 2 background observations.
Background - Why USANA's stock price might remain high despite not having a credible business model.
- The float of the USANA stock makes it difficult or impossible for short sellers to borrow adequate stock. Thus, an essential feature of the market may not correct the price of USANA stock.
- The executives of USANA have the incentive to keep the stock price high because their compensation is tied to the stock price. This doesn't mean that the senior executives are dishonest, only that their incentive is to keep the stock price high.
The 8 Red Flags, my summary.
- Untenable Business Model - USANA claims in it advertising to potential distributors that in the traditional retail model, with national, regional and local distributors, costs 75% more than a networking model. Minkow describes this as "fairy tale" story. He argues that if the USANA model could save 75% of distributor's costs, then why are USANA's products much more costly than comparable retail products? How has the saving been passed on to the distributor and ultimately the consumer, asks Minkow?
- Material Non-Disclosure - The report questions why USANA represented to the FTC that the new business opportunity rule would "make it difficult, if not impossible for USANA to continue growing", but then told the SEC that the FTC's business opportunity rule might only "require USANA to change some of its pre-sale disclosure practices." Well, which is it? Disaster or some change in pre-sale disclosure?
- Misrepresentation about Average Income - The USANA website reports that the average income of a distributor was $802.68. Minkow argues that this is misleading in two respects. First, the average is gross sales and not net income. Second, the reported average is too high because USANA only counts the distributors active in the last 3 months to calculate the denominator. Depending on the turnover rate, the average gross could be significantly less.
- Misrepresentations about Business Opportunity -After attending a presentation at the Utah company's location and taping it, Minkow's team was told that the AG of Utah had endorsed the company. The AG's office denies this.
- Endless Recruiting Chain - Minkow argues that USANA does not sell 70% of its products to consumers, and therefore should not be granted the safe harbour from illegal pyramid prosecution.
- Unregistered Securities - In the opinion of Doug Brooks, the distributors purchases of the USANA business opportunity are unregistered investment contracts because the bulk of the distributor's success relies upon how well his recruits do recruiting. (I believe that at English law this is what gives rise to an unregistered lottery.)
- Integrity of Owner - Minkow discovered that a previous majority owner had renounced his American citizenship, but his residence was not disclosed in the SEC filings. It now appears that majority owner is a company incorporated in the Isle of Man, with the sole corporate shareholder residing in Liechenstein..
- Stock Trading Patterns - The company has purchased on the open market a large number of shares, while insiders sold at the same time.
According to the Wall Street Journal, USANA disputes these findings because although
"Mr. Minkow says the company's sales model is unsustainable because it requires the constant recruitment of new associates. Eventually, he argues, the company will run out of distributors, who will face long odds selling products or recruiting new disciples. Usana's major product, a multivitamin, is far more expensive than rivals.
As of the end of 2005, only 37% of Usana's associates had ever earned a commission, according to the company's latest figures. Among those who had been paid, the figures show, 87% didn't earn enough to cover the $116 they have to purchase or refer each month to qualify for commissions.
Usana says this kind of analysis misses the point. "The inherent goal isn't about coming in to, quote, break even," says Fred Cooper, the company's executive vice president of operations. Most associates are interested in purchasing the vitamins without commissions, Mr. Cooper says, and most distributors view what they can earn as a vitamin discount, not as a path to profits."
Well, I hazard the guess that if most if not all distributors aren't earning profits, they would view what they can earn as a vitamin discount.
But a discount from what price? Certainly not ordinary retail prices for vitamins.
For more stories on USANA, click here.
Comments
usana a cambiado mi modo de vida , estoy muy agradecido con usana , sr. minkow por favor ya madure��
Posted by: miguel heredia | December 7, 2007 3:27 AM
Whatever dude ! it was obvious that barry is trying to make some money out of this. My parents started with USANA about one year and a half ago and now they are receiving aprox. 1700 dollars a month, and their business keeps growing up. This business is not something that will happen from one day to another it requires hard work but it also pays more than any network marketing business. USANA is the perfect business and it has helped all the family in a way we thought impossible. USANA is a dream come true for my family and it´s just lame to hear this kind of reports tryint to mislead people about the USANA concept. Im saying this becuz we have experience the integrity of the company and it?s impressive. So please before adding these type of bullshit try to experience the company personally. Pliz if somebody is thinking about joining this company dont be deceived by this kind of trash! This company will change your life as it has changed ours.
Thanks!
Posted by: Mario | September 19, 2007 6:05 PM
This comment does not address the staggering amount of information uncovered by FDI, nor the possible delisting of stock as a result of their auditors resigning.
Posted by: Michael Webster | August 21, 2007 11:19 AM
I am an outsider doing research for a article... i think in this case, it seems as though Minkow tried to make some quick cash with using his status as a report for wall street journal.....he put in some put options before unveiling the article in hopes to make money... that put his character back in a hole and now it seems that he continues to progress on this USANA matter, even though the steam of controversy it lost. The fact is the companies model is not unlike any other type of business... those that utilize the business process will be the most successful, those that do not do much will not make much and be asked to be in a youtube video for barry minkow. If i am in real estate and i do not prospect listings and buyers, i will not make too much money. I think the % of those with real estate licenses and the % of those that are making $ in real estate are far more daunting than USANA... Far far more. I have a real estate license and was under the impression that I would be able to make money... i have given minimal effort and being discouraged I have made no money.... lets question the real estate market? no lets question my tact and persistence. get it? I think Minkow is a little bummed that he let is selfishness get the best of him again... he is the guy getting pushed into the swimming pool and scratching and clawing before falling in.
Posted by: sK | August 18, 2007 9:54 PM
But is he wrong about Usana?
Posted by: michael webster
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July 25, 2007 7:48 PM
I think Barry Minkow is a DOUCHE BAG!!
Posted by: bob | July 25, 2007 3:05 PM
Could you provide a link to the information that you are relying upon? Thanks
Posted by: michael webster
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June 17, 2007 12:20 PM
GNC rated a 2.0 out of a 5.0 in Lyle MacWilliams Nutritional Supplements 07? USANA rated 5.0. Barry Minkow stated that GNC was the same as Usana but cheper? Berry needs to do better research.
Posted by: Noe Rodriguez | June 16, 2007 6:08 PM
Nick, that is interesting. But don't you also want to make sure that you cannot find better supplements at a cheaper price? Minkow argues that there are these alternatives.
Posted by: Michael Webster | June 4, 2007 9:01 AM
I glady pay $39.99 a month for two bottle of vitamins help my health tremendously. unlike other vitamins, USANA have really helped me. you cant compare payless shoes to nike shoes. I truely see the quality because my health have improve so much. my health is not something i gamble with. As a Customer Im willing to pay 5x more for the USana vitamins if i have to.
Posted by: Nick | June 4, 2007 2:54 AM