According to a recent report from CBS News, "Direct-marketing firm Quixtar Inc., a sister company of Amway Corp., has sued 30 people who anonymously posted what it considers disparaging remarks about Quixtar in blogs and online forums and in YouTube.com videos."

The company is seeking subpoenas to compel internet sites, including Google (NASDAQ: GOOG)'s YouTube, to give the company information it needs to find out who is making the videos that it believes are defamatory. Amway/Quixtar believes some of the videos were made by former distributors who unsuccessfully sued the company and are under court order not to disparage the company.

For years, Amway has been battling allegations that the company is a pyramid scheme. In 1979, the FTC ruled that Amway was not a pyramid scheme, but ordered the company to change many of its sales and marketing practices.

Unfortunately, the media as a whole lacks a strong understanding of how Amway and other multi-level marketing companies work. For instance, take this line from the CBS piece:

Quixtar develops and manufactures nutrition, beauty and cleaning products that are marketed in the United States and Canada through a tiered selling system, hiring entrepreneurs to sell its products.

This is not even close to how Quixtar really works. Quixtar does not "hire entrepreneurs." "Independent business owners," as Amway euphemistically calls them, must buy products in order to qualify for commissions, and can earn by recruiting others to buy products as well. Sites like Pyramid Scheme Alert have documented how little "selling of products" actually happens.

USANA Health Sciences (NASDAQ: USNA) just can't seem to wake up from its PR nightmare.

After the close of the market yesterday, San Diego class-action lawyer Alexander M. Schack said he filed a lawsuit in California state court on behalf of hundreds of low-level distributors in the state. The suit is also seeking an injunction preventing the multi-level marketing company from recruiting in the state.

Needless to say, California is a huge market for USANA and, at the very least, the publicity could hurt the company's recruiting efforts there.

According to Robert FitzPatrick of Pyramid Scheme Alert, "The essence of the Usana scheme is the chain letter. Participants pay up to $1,000 to participate in the "binary compensation" plan. They buy the bogus "business centers" (pyramid positions). They then must continue to buy over $100 of goods (priced in some cases 20 times more than comparable products sold in retail stores) every month. Of each dollar that the participant pays in, 40% goes to the upline recruiters. Of that amount, 70% goes to the top 3% of the pyramid chain. Virtually no one
retails the products at retail price. The prime consumers of Usana are just the "Associates" (pyramid participants.) Thus $28 of each hundred spent by the new recruits goes directly to schemers at the top of the pyramid. The bottom 97% are a continuously churning group. 2/3rds of them quit within a year. None makes a profit unless they can climb into the 3% by recruiting other victims."

USANA responded by saying that the suit was without merit and "relies on false claims made by a stock fraud felon who stands to profit from a decline in USANA's stock price."

If USANA wants to stop the bleeding, it will need to come up with a better defense. Barry Minkow, who the company's statement refers to, has earned a strong reputation for uncovering fraud and deception and was mentioned in Newsday a few days ago for his work in shutting down a $16 million ponzi scheme in New York.

Authorities have commended Minkow because he has a track record of providing facts that can be used to shut down financial crimes in progress. If USANA wants people to believe it is something other than that, it will need to provide a rebuttal to the allegations, something that is hasn't done so far.