A class action lawsuit on behalf of Usana Health Sciences distributors has been filed today in San Diego County by attorney Alexander M. Schack. The plaintiffs include Jeannette Johnson, Christopher Crane, and the Plaintiff Class.
This is huge. The most notable snippets from the complaint include:
- Prior to and throughout the Class Period, USANA represented itself to be a highly successful company, based on integrity, with a history of record earnings and a solid business model. However, on or about March 15, 2007, The Wall Street Journal revealed the underlying unsustainability of the Company’s network marketing business model, and that the Company was perpetrating a pyramid scheme in an attempt to sell its products.
- Plaintiffs allege that, throughout the Class Period, Defendants failed to disclose material adverse facts about the Company, its business relationships, and prospects. Specifically, Defendants failed to disclose and fraudulently concealed the following: (1) that the Company’s multi-level marketing model operated as a pyramid scheme; (2) that the Company’s business model was unsustainable because it required the constant recruitment of new Associates due to a high level of attrition within the Company’s sales force; (3) that the majority of the Company’s Associates did not actually sell to consumers, but rather to other Company Associates; (4) that over 74 percent of the Company’s Associates were failing within the first year of joining the Company; (5) that over 87 percent of the Company’s Associates were losing money instead of receiving compensation for their sales efforts; (6) that the Company lacked adequate internal and financial controls; (7) that, as a result of the foregoing, the Company’s statements about its future business prospects and projections were lacking in a reasonable basis when made; (8) that the Company’s representation of a 75% reduction in “middleman” costs because of its direct marketing system was false or misleading, as each tier of distribution received approximately 8% in commissions, resulting in prices which were 50% – 400% above standard retail prices; for example, a 28 day supply of premium vitamins sells at GNC for $17 and USANA’s premium multivitamin “Essentials” sells for $40; (9) that Associates would be less, not more, profitable if they opened up more than one “business center” because the only true benefit inured in the Company’s favor because of the increased costs the Associates paid for additional business centers; (10) that the qualifications of members of the Company’s Advisory Board were misrepresented and such members were biased and/or had conflicts of interest which precluded them from providing independent advice; and (11) that the founder of the Company had renounced his U.S. Citizenship and moved substantial assets to the Caribbean tax havens of St. Kitts and Nevis, the Isle of Mann, and Liechtenstein.
- Defendant USANA is a Utah corporation with its principal place of business located at 3838 West Parkway Boulevard, Salt Lake City, Utah. It distributes products, in part, through a multi-level marketing scheme with the slogan “True Health & True Wealth.”
- Defendant Denis E. Waitley was, at all relevant times, a Company director, and a resident of Rancho Santa Fe, California. Mr. Waitley falsified his educational credentials to potential Associates of the Company and to the SEC, stating he had a Master’s Degree and Ph.D when in fact he did not.
- Defendants Christine Wood of Del Mar, California, Ladd McNamara of Oceanside, California and Deborah Waitley-McNamara of La Jolla, California, are all members of the Company’s Advisory Board and directors. Each of these Defendants actively participated in promoting the Company’s multi-level marketing scheme, with Ms. Wood appearing on the Company’s online video presentation. On or about June 4, 2007, Mr. McNamara was forced to resign from the Advisory board because it was uncovered that he was practicing medicine without a license.
- Defendant Myron W. Wentz (“M. Wentz”) was, at all relevant times, the Company’s Chief Executive Officer (“CEO”). Mr. Wentz has allegedly renounced his U.S. citizenship and transferred significant assets to the tax havens of St. Kitts and Nevis, the Isle of Mann, and Liechtenstein.
- Defendant David A. Wentz (“D. Wentz”) was, at all relevant times, the Company’s President and a Company Director, and a graduate of the University of California, San Diego.
- Defendant Gilbert A. Fuller (“Fuller”) was, at all relevant times, the Company’s Chief Financial Officer (“CFO”), Chief Accounting Officer (“CAO”), and an Executive Vice President. On June 13, 2007, USANA filed SEC Form 8-K in which it disclosed that although Mr. Fuller was formerly and consistently reported to be a CPA, in fact he was not, as his license had expired in 1986.
- The Individual Defendants, because of their positions with the Company, were provided with copies of the Company’s reports, opportunity meeting agendas, and press releases alleged herein to be misleading prior to, or shortly after, their issuance, and had the ability and opportunity to prevent the misrepresentations or cause them to be corrected. Because of their positions and access to material non-public information available to them, each of these Defendants knew that the adverse facts specified herein had not been disclosed to, and were being concealed from the public, and that the positive representations which were being made were then materially false and misleading. The Individual Defendants are liable for the false statements pleaded herein, as those statements were each group-published information, the result of the collective actions of the Individual Defendants and others. Additionally, each individual Defendant herein had a direct stake in the success of the USANA network marketing scheme, and gave substantial assistance or encouragement thereto in order to make more money.
- Beginning at a time unknown, but not later than January 1, 1995, Defendants formulated a secret plan to generate substantial revenues from the sale of multivitamins and other products. The plan was designed to convert money from a large number of USANA recruits and redistribute that money to those at the top of the pyramid of Associates. The plan used the lure of making money from home in order to sell such multivitamins and other products at highly inflated prices. In essence, Defendants convinced individuals to purchase products at inflated prices and informed them that they could offset the cost of such products by becoming a USANA Associate and opening one or more business centers. Defendants focused on the success of several insiders, such as Defendants McNamana, Wood, and Waitley-McNamara, who had allegedly made approximately $50,000 per year in commissions. Defendants also stated that if enough effort was put in, with multiple business centers, commissions of $100,000 per year was attainable. In fact, Defendants’ website claimed “unlimited earning potential.” Even the “average” distributor would be amply rewarded.
- Defendants and others had mass gatherings, called “opportunity meetings” to promote the high earning potential of becoming a USANA Associate. These opportunity meetings had a cult-like atmosphere where individuals told of their financial success and the “financial security” USANA provides. Potential recruits were also enticed by allegedly low start-up costs for signing up to be an Associate, with costs as low as $19.95. USANA promised “True Health & True Wealth” at these opportunity meetings, yet the only true wealth was found in the initial perpetrators of the scheme, i.e., those who were at the top of the pyramid.
- If a USANA Associate complained about the difficulty in selling the high priced products, their “upline” Associate was taught to sell them additional materials which allegedly would assist in making them profitable. USANA’s practice was to make unsuccessful Associates feel as if the lack of profit was due to their own inadequacies, as others were extremely profitable. Yet in fact, 87% of Associates were losing money, a fact fraudulently concealed from new recruits.
- USANA and its recruiters knew no bounds. The promotions targeted both the elderly and the not-so-well-off. USANA’s online presentation states that … 40% of Aging Americans are not sure if they have enough money to retire. Half of all bankruptcies are caused by illness or medical bills. The average household owes $8,000 in credit card debt, with most people living paycheck to paycheck, “Change your life”, let USANA be your retirement solution, without high start up costs or complex business plans. You work for yourself not by yourself… Yet, once those on the lower level of the pyramid inevitably failed, they truly were by themselves.
- In one instance, the Fraud Discovery Institute of San Diego uncovered an extremely egregious example. An elderly blind man lost his life savings and mortgaged his home in a failed effort to realize the USANA dream of true wealth. In fact, contrary to the statements made at opportunity meetings, Defendants fraudulently concealed and never disclosed to potential Associates that 74% of Associates failed in the first year. As a publicly traded Company, and because Defendants’ touted the potential profitability of its Associates, Defendants had a duty to disclose these adverse facts, yet never did. Like a true pyramid scheme, the initial members of USANA made money from recruiting others, who recruited others, and so on. However, those further down the line were doomed to fail. As shown by recent events, USANA’s business was built on misrepresentations and concealment, which have caused the Plaintiffs and members of the Class to lose money.
- The statements contained in 30 – 38 were materially false and misleading when made because Defendants failed to disclose or indicate at least the following: (1) that the Company’s business model was unsustainable because it required the constant recruitment of new Associates due to a high level of attrition within the Company’s sales force; (2) that the Company’s multi-level marketing model operated as a pyramid scheme; (3) that the majority of the Company’s Associates did not actually sell to consumers, but rather to other Company Associates; (4) that over 74 percent of the Company’s Associates were failing within the first year of joining the Company; (5) that over 87 percent of the Company’s Associates were losing money instead of receiving compensation for their sales efforts; (6) that the Company lacked adequate internal and financial controls; and (7) that, as a result of the foregoing, the Company’s statements about its future business prospects and projections was lacking in a reasonable basis when made.
- Defendants concealed from the Plaintiffs and the Plaintiff Class the true facts. The true facts were that Defendants operated a pyramid scheme, 74% of Associates failed in the first year, and 87% of Associates were losing money, even though the Plaintiffs and the Plaintiff Class ordered and paid for premium product, Defendants would instead supply the Plaintiffs and the Plaintiff Class with similar product to that found in any retail store, that USANA did not provide “True Wealth”, and that the Company’s stability was questionable as evidenced by Myron Wentz’s attempt to insulate himself from the jurisdiction of the United States judicial system.
- Defendants intended that the Plaintiffs and the Plaintiff Class rely upon the omissions and false representations set forth in the USANA website, promotional materials, and at opportunity meetings. The Plaintiffs and the Plaintiff Class reasonably relied upon Defendants’ misrepresentations and they agreed to enter into individual standardized agreements to become USANA Associates and to purchase USANA product at premium product prices.
The plaintiffs are asking for damages and for an injunction to stop Usana from conducting business in its current fashion in California. They are also asking for an injunction to prevent Usana from moving money or assets out of the United States.