Usana Health Sciences, Inc. (NASDAQ: USNA) critic Barry Minkow established the Cheating in China website a few months ago, positing that the company's growth and profitability relied on a complex scheme involving the elicit recruitment of Chinese citizens -- a country where multi-level marketing is generally illegal, and in which Usana does not have a license to operate.
According to a press release issued by Minkow's Fraud Discovery Institute this morning, the Nanning Business Administration Department, "Shuan Sheng" Branch Economic Inspection is taking a look.
According to Minkow, "It would appear that the interrogation notice is interested in both the individual and the company as a whole". On the Cheating in China website, Minkow has posted evidence of Usana distributors seeking to recruit Chinese nationals, in sharp contrast with Usana CFO Gil Fuller's proclamation on a 2006 conference call that "We don't have any associates in China".
An investigation of the company by the Chinese government would seem to raise questions about the validity of that statement.
It's certainly possible that Usana corporate isn't involved in or directly aware of the recruitment of Chinese distributors. But if they weren't, that raises another set of questions about the company's management and internal controls. A class-action lawsuit filed against the company and certain employees and distributors alleges that "USANA lacks the internal controls to insure that the Company is not operating as a pyramid scheme."
Alpha Health Source President Syble James adds that "It is conceivable that anyone anywhere in the world with access to USANA's products could be selling its products and recruiting distributors without USANA's knowledge. That is one of the major weaknesses in the company's business model and operations... Although the company may not be involved in a conspiracy to violate the law, due to the inadequacies in its business model and operations USANA may not be aware of or be able to prevent violations."
If Usana associates are indeed actively recruiting in China -- and there appears to be little doubt that they are -- one of two things is possible: Either Gil Fuller was lying on the 2006 conference call or the company's internal controls are so weak that its senior management isn't aware of the countries where it does business. Either of those scenarios bodes poorly for Usana investors.
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