Usana Health Sciences (NASDAQ: USNA), a multi-level marketing company that has come under the scrutiny of ex-con turned gumshoe Barry Minkow, The Wall Street Journal, Forbes, and a host of other critics, released its earnings on Tuesday afternoon, and hosted a conference call to discuss them yesterday. We got the usual mix of softball questions from cocker spaniel analysts, but CFO Gil Fuller actually did provide some revealing information in response to a question from D.A. Davidson analyst Tim Ramey. From the transcript, made available on SeekingAlpha:
Tim Ramey - D.A. Davidson
Great. And one more quick one on the Autoship number going up. I was -- I guess I had in my head that it would probably never go up, that as you became more international, those numbers would -- the mix would change and you probably wouldn't, why would it go up, what happened to make it go up?
Gilbert Fuller
Tim, one of the things that we try to do sometimes more successful than others is create incentives for people to be on Autoship. And just looking at it by country here, it looked like we had the U.S. go up a couple hundred basis points in the quarter versus on a consecutive basis for the second quarter. And that was what drove, since it's the biggest market that we have -- that was the thing that seemed to drive our overall number up nicely. So we are always looking for ways to give folks a reason to have their products on Autoship. It helps compliance. It's a great -- that is, they will likely to keep taking their products and also of course, it's a great cash flow thing for us and also gives us some visibility as to what's coming.
In 2003, ex-con turned fraud buster Barry Minkow delivered a report to regulators suggesting that MX Factors LLC was engaging in a $39 million fraud. Later that year, MX Factors collapsed when the California Department of Corporations shut it down on the ground that it was operating an illegal Ponzi scheme -- paying off earlier investors with money acquired from later investors.
According (subscription required) to The Wall Street Journal, Mr. Minkow more recently helped law enforcement find mastermind Richard Harkliss, who had fled to Mexico. He was arrested in Arizona while visiting relatives.
The report Minkow prepared on MX Factors is not unlike the one he put together on Usana Health Sciences (NASDAQ: USNA), the multi-level marketing company he has accused of operating an illicit pyramid scheme.
Here's an interesting quote from a recent Forbes piece on Usana: "Why would anybody take this guy seriously?" Usana spokesman Joseph Poulos said Tuesday. "What is he an expert on? He isn't a forensic accountant. He just committed one very large crime once."
MX Factors is the latest in a string of more than $1 billion in fraud uncovered by Minkow, and that doesn't even include Usana Health Sciences (although you could make a strong case it should).
Rather than rebuking claims made in Minkow's report, Usana has chosen to go the ad hominem route -- focusing on Minkow's criminal past. One can only hope that they will have the fairness to also remind investors of Minkow's stellar track record as a fraud investigator. I somehow doubt they will.
Usana Health Sciences (NASDAQ: USNA) claims to be a vitamin company that distributes its products through a multi-level marketing business model. But a report released by Barry Minkow and his Fraud Discovery Institute in March suggested that the vitamins were merely incidental to the illicit pyramid scheme that Usana was operating, and the stock plunged.
But here's something new to consider: Based on my investigation, it appears that some Usana distributors are marketing the Usana "business opportunity" as something else entirely: a tax shelter. For example, a New Zealand Usana distributor with the URL uniquehealth.usana.com writes, "... the fact is a USANA business can save you up to $6,000 plus in a tax return every year. This is not just $6,000 in extra deductions, but an extra $6,000 in YOUR pocket each year - regardless if part-time or full-time." The distributor also gives a list of the potential deductions including automobile expenses, a portion of your mortgage, phone accounts, child care, "pay your kids to work for you, and write it off," and 100% of initial start-up costs.
Uniquehealth is not alone. My investigation of the websites of dozens of Usana distributors found claims of too-good-to-be-true tax savings were widespread. Usana doesn't make these claims on its own website, but the fact that numerous distributors do raises questions about the real reason that people become Usana distributors.
In addition to numerous misrepresentations about its own company, the management at Usana Health Sciences (NASDAQ: USNA) has also taken to slandering its chief critic, con-man turned gumshoe Barry Minkow. Now Minkow is fighting back.
In a letter to Usana President David Wentz and CFO Gil Fuller also posted on his Fraud Discovery Institute's website, Minkow writes:
I have struggled over the last several weeks to remain silent in response to the multiple slanderous accusations made by your company in both your SEC filings and public statements. You and your paid supporters have made one false accusation after another, including your company's statement in the recent Forbes article: "We believe everything he [Barry Minkow] says to be false," Usana spokesman Joseph Poulos told Forbes.com. "He's a liar; he's a criminal -- he can't be trusted." Now Mr. Poulos said this on the record to a national magazine knowing it not to be true because even he believes that everything I have said is not a lie or he would have prevented (just to give one example but be assured these examples could be readily multiplied) Mr. Waitley from resigning from the board of directors as our reporting of the non existence of his Masters degree from the Naval Academy was dead on (again just to provide one example).
Of course, anyone following the Usana story knows that Mr. Poulos is, at best, completely out of touch with reality. I recently did a post comparing him to Baghdad Bob. Minkow also shows the first real evidence of accounting fraud at the Salt Lake City multilevel marketing company. Read the letter to see that.
USANA Health Sciences (NASDAQ: USNA) continues to mount one of the lamest defenses I have ever seen amidst swirling allegations of misrepresentations and outright fraud. After New Zealand's National Business Review published a scathing expose of the company's shady business practices, Daniel A. Macuga, Vice President of Network Development and Public Relations for USANA, defended his employer with a passionate letter ... that was soundly and completely rebuked by the paper.
First of all, let's give credit where credit is due. USANA did the right thing in sending someone new out to defend the company after Joseph Poulos did such a bad job that I started calling him Salt Lake Sam.
Be sure to read Macuga's letter and the brilliant point by point rebuttal. if you like watching big companies get it handed to them by journalists, you'll love it.
The independent auditors of public companies don't resign for no reason, but USANA Health Sciences (NASDAQ: USNA) would like you to believe that Grant Thornton LLP did just that.
In a press release announcing the departure of the auditor, USANA said that the "Audit Committee and Grant Thornton did have an initial disagreement regarding the appropriate scope of review procedures following unfounded, third-party allegations that appeared in the media in March 2007. That difference of opinion was resolved to the satisfaction of Grant Thornton, the Company, and its Audit Committee."
Sure it was! That's why they resigned! In other words: "My wife and I were having marriage problems, but we found a wonderful therapist to help us work through them. We resolved our marital issues, and then we got divorced."
USANA's explanation just doesn't make any sense, which probably explains why the company pre-announced its estimate-beating earnings by one day and used them to bury the news of the auditor's resignation -- The pre-announcement came two minutes after the news of the auditor's resignation.
When do enough red flags get raised before one says: "I simply cannot rely upon the senior management or the Usana board of directors." How many things must be shown that were previously hidden before Wall Street realizes the issues with Usana Health Sciences, Inc. is not about EBITA or EPS or even ROI,which the analysts keep pointing to but rather the issue is a five letter word: FRAUD.
Sure, USANA beat the estimates, and the stock traded up after hours accordingly. It could trade up tomorrow as well. But the questions about USANA are not about this quarter. The tenability and legality of the business model are what is in question, and beating estimates by 3 cents doesn't change that.
Shares of Mannatech (NASDAQ: MTEX) are down about 23%, making the shares the top decliner on the NASDAQ. The problem? According to the Wall Street Journal, "The Texas attorney general has asked a state court to bar Mannatech Inc. from allegedly illegal sales and marketing practices, saying the dietary supplement seller is falsely claiming its products cure, mitigate, treat or prevent diseases such as cancer, autism and Down's syndrome, in violation of state and federal laws."
You can read Attorney General Greg Abbott's complaint here. Mannatech has been under fire for months, after the Wall Street Journal ran an unfavorable piece on the company, exposing much of the same wrongdoing that the Texas lawsuit accuses the company of.
Like Amway and Usana Health Sciences (NASADAQ: USNA), Mannatech distributes its products through a multilevel marketing business model. Associates seek to recruit others into the fold, earning commissions on their sales, and the sales of those that they recruit.
According to Mannatech Chairman Sam Caster, "We walk the fine line of always stating our case appropriately and always training our people. We're not into the treatment, cure or mitigation of disease. We're into the improvement of quality of life ... everybody benefits from good nutrition."
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Mr. Caster can talk about "always training our people" but the fact is that no such training is required to distribute Mannatech products and recruit other distributors. Misrepresentation seems like a direct result of the nature of the business model.
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.
The New York Post reported today that the SEC is looking into the timing of USANA Health Sciences (NASDAQ: USNA) chairman Myron Wentz's sale of 85,000 shares of the company's stock on February 12th at $60.98, less than a dollar off the stock's all-time high. On March 12th, Barry Minkow and the Fraud Discovery Institute released a scathing report on Usana, characterizing it as a pyramid scheme with a hopelessly overpriced product, sending the stock tumbling. The shares closed on Tuesday at $41.36.
According to the Post, regulators are trying to figure out whether Wentz was tipped off about Minkow's report in advance. Usana hired Kroll, a corporate investigation firm in late April. In December, Minkow had tried to hire the same firm and had shared much of his research on the case with them before any agreement was reached.
Usana disclosed in March that the SEC was investigating the company based on Minkow's allegations.
Yesterday on BloggingStocks, I wrote about the latest in a series of credentials flaps at Usana Health Sciences (NASDAQ: USNA), the multi-level marketing company that has attracted the ire of ex-con turned gumshoe Barry Minkow. It turns out that CFO Gil Fuller let his CPA license lapse in 1986, although recent SEC filings say that he has the credential. Utah state law state law doesn't allow people to call themselves CPA's unless they renew their license periodically and get continuing education units. But according to Fuller, it's really not misleading: "I say Gil Fuller is a CPA. That is in my view an accurate statement. I should have gone on to say I let my license to practice public accounting expire." (emphasis added)
But you see Gil, here's the problem: is has a different meaning than was. Consider the following examples:
Enron is one of the most respected companies in the world.
Enron was one of the most respected companies in the world before it was exposed as a fraud and numerous former officers at the company were hauled off to jail, although one died of a heart attack before he got around to serving any time.
The New York Post reported today that Usana Health Sciences (NASDAQ: USNA) CFO Gil Fuller doesn't really have a CPA; he just says he has one in SEC filings. This is perhaps the most serious in a series of credentials flaps for Usana that I've listed on BloggingStocks last week. Here's the updated list:
Denis Waitley, a director at the company, decided not to stand for re-election after investigator Barry Minkow uncovered that the PhD listed in his biography came from a long-defunct diploma mill. He also does not possess a Master's degree, although one was reported in numerous SEC filings.
Dr. Timothy Wood, Vice President of Research and Development at the company, claimed to have a PhD in biology, but it's actually in forestry, which seems less relevant at a company that makes nutritional supplements.
Myron Wentz, the company's founder and Chairman, renounced his U.S. citizenship to "move" to the tax haven of Liechtenstein.
And now, according to the Wall Street Journal, Dr. Ladd McNamara has left the company's medical advisory board after it was discovered that he no longer has a medical license [subscription required]. A Usana spokesman said that McNamara surrendered his license in Georgia in 2004 in response to allegations that he improperly prescribed medication to a family member. He also agreed to a lifetime ban from practicing medicine in Ohio.
CFO Gil Fuller claims to be a Certified Public Accountant. While it's quite common to let a CPA license lapse, he hasn't been one since 1986. Back then, people were terrified of communism, everyone in Boston hated Bill Buckner and the New Kids on the Block were cool -- OK, no, they weren't. But the point is that being a CPA in 1986 doesn't really mean anything in 2007.
In a few weeks, Usana will be releasing its quarterly earnings. You have to ask yourself: Given that the company 's management can't seem to stop lying about their credentials, why should we believe the earnings numbers they present, or anything else they say?
In just the past few months, Usana Health Sciences (NASDAQ: USNA) has had more scandals surrounding biographical errors than any company or organization that I can think of. Take a look:
Denis Waitley, a director at the company, decided not to stand for re-election after investigator Barry Minkow uncovered that the PhD listed in his biography came from a long-defunct diploma mill. He also does not possess a Master's degree, although one was reported in numerous SEC filings.
Dr. Timothy Wood, Vice President of Research and Development at the company, claimed to have a PhD in biology, but it's actually in forestry, which seems less relevant at a company that makes nutritional supplements.
Myron Wentz, the company's founder and Chairman, renounced his U.S. citizenship to "move" to the tax haven of Lichtenstein.
And now, according to the Wall Street Journal, (subscription required), Dr. Ladd McNamara has left the company's medical advisory board after it was discovered that he no longer has a medical license. A Usana spokesman said that McNamara surrendered his license in Georgia in 2004 in response to allegations that he improperly prescribed medication to a family member. He also agreed to a lifetime ban from practicing medicine in Ohio.
Embattled multi-level marketing giant USANA Health Sciences (NASDAQ: USNA) hosted a quarterly earnings conference call on Wednesday that was questionable on a multitude of levels. The analysts continued to play the role of lap dog, failing to ask a single tough question. When I spoke with Certified Fraud Examiner and USANA critic Tracy Coenen about the call, she joked "Do you think the analysts are secretly USANA distributors?"
During the call, USANA management claimed that 88% of its distributors sign up because they want the products, not because they want to build a business. But the company declines to disclose its attrition rates -- the number of distributors who fail and leave the company each year. In fact, USANA's CEO wrote to the FTC to say that a proposed rule requiring network marketing companies to disclose their attrition rates would harm the company's ability to recruit.
According to Barry Minkow and the Fraud Discovery Institute's report, "Clearly, disclosure of failure rates is important when potentially 90% of the distributors (who bring in 86% of the company's direct selling revenue) will collapse within a 12-month period. Moreover, if USANA wants to fight the FTC on disclosing these statistics to distributors, so be it. However, the lawful thing to do (and that which the company should have done) is to disclose these pertinent issues to investors."
I certainly agree with Mr. Minkow on that point, but here's what I don't understand: If only 12% of USANA distributors sign up with the intent of building a business, why is that attrition rate so high, and why won't the company disclose it?
A college-age friend of mine keeps a large stuffed elephant in his dorm room. When people ask him why he has it there, he replies "Ssssshhhhhh . . . we're not supposed to talk about that!" I was reminded of this friend when I listened to Usana Health Science's (NASDAQ: USNA) 1st quarter conference call. Here's some of what's happened with Usana in the past month:
Ex-con turned private investigator Barry Minkow released a report suggesting that the company's business model was an unsustainable pyramid scheme.
Minkow accused a prominent director and spokesman for the company of inflating his academic credentials. The company admitted the "errors" and the director decided not to stand for re-election. Minkow also suggested another senior executive at the company had inflated his resume.
A slew of shareholder class-action lawsuits have been filed against the company.
The company announced that the SEC had begun an informal investigation of the company.
Fast-forward to Wednesday's conference call. Every question asked seemed to have a bullish slant, and assumed that the company was innocent. Questions centered around whether the company has seen an impact on sales from Minkow's report, and whether the company saw this as an opportunity to buy back more shares. I spoke with Barry Minkow about the conference call and he said, "I don't believe one thing they say" and also pointed out that "There was not one tough question allowed to be asked during the conference call."
The battle between ex-con turned gumshoe Barry Minkow and multi-level marketing company USANA Health Sciences, Inc. (NASDAQ: USNA) continues. A couple weeks ago, I spoke with Minkow about his efforts to discredit the company, and the company's subsequent decision to file a lawsuit against him. Minkow carried on today, releasing a press release questioning the academic credentials of a Usana director/spokesman, and posting a video on YouTube where he visited a handful of retail vitamin stores to compare the prices of Usana's products to those of other brands. From the press release:
"According to Barry Minkow, independent licensed private investigators who specialize in examining resumes could not confirm that Mr. Waitley had earned a M.A. degree from the Naval Post Graduate School, in Monterey, California. Moreover, the Doctorate, or a Ph.D. in Human Behavior from La Jolla University listed in Mr. Waitley's resume, appears to have come from a now defunct and never-accredited "diploma mill," according to Minkow. Both alleged degrees are listed on official S.E.C. filings...
"In other developments, the second segment of the FDI response to Usana has been posted on YouTube.com. In this segment, Barry Minkow brings a film crew to four vitamin stores and purchases numerous vitamin products to compare prices with Usana's top selling, Usana Health Pak 100(TM), which wholesales for $118.00 for a one-month supply. "There is no objective, rational person who can watch this segment and conclude that, compared to comparable vitamin packs sold in retail stores, that the Usana product offers the consumer with any savings whatsoever - but is actually hopelessly overpriced when compared with multiple products from different companies."
When I spoke with Barry Minkow about the new developments, he referred to a "smoking gun." I am inclined to agree. So far, the Fraud Discovery Institute has uncovered that the company's CEO became a resident of Lichtenstein to avoid taxes and uncovered evidence that a key director falsified his educational credentials. Unless Usana can come up with compelling rebuttals, investors have to ask: What else is Usana hiding?
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