21 Jan

Usana Health Sciences Knows it Products are Being Sold Illegally in China

Almost three years ago, Barry Minkow and Fraud Discovery Institute released a report on Usana Health Sciences (NSDAQ:USNA), listing ten red flags of fraud he and his team (which included me) uncovered about the company. The report criticized the company’s business model, essentially calling it a pyramid scheme in which recruiting is the focus (rather than the actual sale of products) and pointing out how little money Usana distributors actually make.

For example, the company touts average income of $802.62 per North American distributor per month. But that’s very misleading. The income is very top-heaving, meaning a select handful at the top of the pyramid make a lot, and almost everyone else makes nothing. Further, this is gross income, not net. Associates have to pay all their business expenses out of this, leaving them with much less at the end.

And the truth is that Usana has an ugly history of manipulating the “earning” figures to make it look like distributors are earning more than they really are.  Take a look at the reality. The bottom 64% of associates make nothing. The bottom 92% of associates make $6 per week or less (still with that 64% making nothing).

Indeed, Usana is just like all other multi-level marketing companies: Almost everyone who participates loses money. It doesn’t take a lot of guesswork to figure this out. Usana’s own numbers prove this reality.

Following the first report, several updates were issued. It was determined that Usana executives and board members had been lying about their credentials. FDI demonstrated how little product Usana reps are actually selling. And FDI criticized Usana for knowing about illegal sales of its products in China (where multi-level marketing was illegal), and actively participating in the process.

Usana filed a lawsuit against Barry Minkow in late 2007, but eventually the lawsuit Usana filed against Minkow was settled. First the court made Usana pay Barry Minkow’s legal fees. It was clear that Minkow was winning the court battle. Then Usana came to its senses and dropped its lawsuit after agreeing to pay Minkow an undisclosed sum of money.

Little has been heard about Usana since, but it’s time to revisit the issue of sales in China. Right before the release of FDI’s report on Usana sales in China, the company acknowledged what a lucrative market China is:

For us, China is a wait and see, with the laws the way they are and currently they are throwing more laws and getting stricter.  We see that as a very difficult environment to be successful.  We are waiting to see if some of the other companies crack the code and come up with a way to be successful there.  We have not seen a lot of success from our competitors.  We do not want to jump into that situation that has not been successful for others.  So we are going to have things going slowly in the sidelines, keeping an eye on it and watch it till we believe it is a potentially successful market for us and then we will pursue with great speed.

Minkow released his report on illegal selling of Usana products in China, and Usana was unusually quiet about the issue. No press releases. No discussion of it on conference calls. The issue died rather quietly.

But new information suggests Usana is well aware of the illegal selling of its products in China. An internal compliance training document shows that Usana knows all about illegal sales:

IV. What is the biggest market that buys our products that we are not eligible to operate in?

i. Once again I couldn’t give you an exact answer on this. Since I work with our Asian markets, I know that a large sum of product ends up in China, but I’m sure product somehow gets shipped to other unauthorized markets as well…

Of course the company can distance itself from these sales by simply calling the participants “rogue associates”:

VI. Question #6: Which market experienced the greatest sales growth from 2007-2008, and by how much?
i. Answer: East Asia (Hong Kong mainly and a little Taiwan), increased by almost $13 million.
ii. Things to look out for – rogue associates in Mainland China, trying to order US product.

Is Usana doing anything to cut down on these illegal sales? It’s hard to know, but they certainly haven’t addressed the issue publicly. Why would Usana choose to not enforce the rules with its associates? Probably because the market in China is so huge and there is a lot of money to be made. The company doesn’t have to take any serious actions if regulators aren’t pushing the issue. They can sit back and collect their money, knowing that someday illegal sales in China might come back to bite them, but knowing that in the meantime they’ve made enough money from it to make whatever small punishment (if any) they receive worthwhile.

Why has Barry Minkow gone after multi-level marketing companies and why does he continue to go after MLMs? Because people are literally losing billions of dollars each year to these schemes which promise riches and deliver financial devastation to almost everyone who participates. People sign up with the intention of making money (maybe even just a little bit) and end up spending far more than they ever earn.

9 thoughts on “Usana Health Sciences Knows it Products are Being Sold Illegally in China

  1. Is this “Large Sum” of illegal product sales enough to warrant an investigation by the SEC into whether it accounted for their Asian Market growth, which was the only area they achieved any growth in for quite some time? Shareholders were deceived.

  2. Today USANA announced their intentions to enter China. They did something similar 5 years ago during their Q3 2005 conference call. If the SEC investigates, they will already find that USANA has been ILLEGALLY recruiting distributors from mainland China for quite some time. USANA is breaking foreign laws and their auditor PriceWaterhouseCoopers was notified of this and their Internal Document that stated a “LARGE SUM” of product ends up in china.

    Now that attention is on USANA and China, will the seriousness of this illegal recruiting finally be dealt with?

  3. Oh please….

    If Chinese people can afford and want to buy USA products and someone is willing to buy them in Hong Kong and ship them to China then so what? It is obviously not that much as a percentage of the population! Gimme a break, and we let then ship poorly manufactured products into the USA without restriction in the Billions, come on guys if people want to do Network Marketing (Direct Selling since Usana is NOT MLM) then let them.

  4. Yosef,

    China allows Direct Selling through SINGLE LEVEL compensation plans. However, USANA “IS” MULTI-LEVEL. USANA is a MLM. Why do you believe USANA is not MLM?

  5. How can a company that teaches its “associates” to disown family that won’t participate in the pyramid NOT be a fraud. This is brainwashing at its awesome-most evil. According to my adult son, he would succeed in this business if mother weren’t so “negative”. I grieve the loss, and he loses money by buying an illusion. And this is legal?

  6. SadMother,

    Are you sure your son is being taught this by the company? seriously, I’m in my mid 20’s and i know very well, and so do most parents. Children are rebellious. I’m sure this Disowning family drama has nothing to do with the company but more to do with communication issues between your child and yourself. and i’m not saying anyones a bad mother or bad person, its just very common for these kind of disagreements to occur because you are so close to each other you tend to get angry when your mum or ur son doesn’t understand where you’re coming from. Thats absolutely normal!

    Treat him how you’d like to be treated if you saw a genuine opportunity and hear him out. I’m sure you didn’t give birth to a son who can easily be influenced without cause. No one is stupid, And your “adult” son needs to take responsibility for his own actions. Playing the blame game is probably the reason he’s not “successful” yet. Its okay, its all a learning process. Get him to read more wealth creation books.

    There is nothing wrong with him trying to be entrepreneurial, and theres nothing wrong with you being worried. At least he’s not asking you for 10’s of thousands of dollars to start up some coffee shop or something else, which would easily take as long, if not longer to build into a fruitful venture… thats IF he doesn’t fail.

  7. You are not acting like an “adult” as you offer your “wise” words of wisdom to someone who is probably twice your age. Do you realize how condescending your post is? Do you also know you sound like an MLM shill?

    MLM people employ common brainwashing/cult-like techniques: ” Accept everything we say as truth”;
    ” Stay away from negativity”. It’s very effective and can damage/destroy relationships.

    Spouses often end up in divorce court–and yes, young adult children often distance/separate from their families.

    I have only empathy and compassion for SadMother. I have nothing but contempt for you. Grow up.

  8. Hello “Adult” (not!).

    I am more than 3 times your age, and my son is more than twice as old. He and I have enjoyed a strong relationship until he started taking wealth creation books seriously. Most of them are absolute frauds, as the “wealth” has been created by the sales of books and very expensive seminars for their authors and sycophants.

    I’d rather mortgage my house for a legitimate enterprise, even if it were to fail, than have him continue the Usana daydream. Failure creates experience which creates wisdom; hype does not.

    No, he is not stupid – just caught up in the spell of something for nothing but talk. My gripe is not with him – it’s with the manipulative script that hasn’t changed since Amway and their ilk made unrealistic promises based on pyramids. He’ll change when he realizes that wrecked relationships are not the way to happiness.

    MadMother

  9. Tracy,

    USANA keeps having my Google Email account suspended. I posted a message on the Google USNA finance page regarding USANA’s growth in their E. Asia market. I wrote the following:

    QUOTE
    Just as the last quarter, USANA’s North American Region suffers from lack of distributor recruiting. All the growth for USANA is coming from their E. Asia market, mainly Hong Kong. When will the SEC look into where the money is coming from? USANA has admitted last year in a secret internal document that a LARGE SUM of revenue comes from Illegal Recruiting of distributors from mainland China. I believe this illegal activity continues and is the prime reason for USANA’s growth in the E. Asia market.

    To read more about the Illegal China recruiting, please visit:
    http://www.usanawatchdog.blogspot.com
    END QUOTE

    About 30 minutes later, I tried to log into my Google Email Account and it stated that is has been temporarily Disabled. When I checked my posting on the Google USNA finance page, the posting I wrote had been removed.

    This is now the second time USANA has had my account banned regarding this illegal China recruiting. Sad thing is, I even reference USANA’s own document that states it themselves!

    This is really getting ridiculous…

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