Medifast Files Lawsuit, Fraud Discovery Institute Reopens Investigation

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UPDATE: On February 17, 2010, Medifast Inc. filed suit in US District Court, Southern District of California, alleging defamation, violation of California Corporations Code, and unfair business practices. On March 29, 2011, Judge Janis Sammartino dismissed all of Medifast’s claims against me in her ruling on my anti-SLAPP motion.

On Tuesday, Barry Minkow and the Fraud Discovery Institute issued a press release stating they were ending their investigation of Medifast Inc. (NYSE:MED) in order to focus on other companies.

One day later, Medifast filed a defamation suit in California against Minkow, FDI, Robert Fitzpatrick, William Lobdell, iBusiness Reporting, me, my company Sequence Inc., and an anonymous message board poster. The suit seeks general damages of $270 million, plus other damages.

The complaint filed by Medifast contains pages of self-praise, along with attacks on the character of those involved in the investigation of the company. In one example of the attacks, Medifast falsely refers to multi-level marketing expert Robert FitzPatrick as “… a self-claimed expert in pyramid schemes.”  A brief look at FitzPatrick’s work clearly shows he’s not a “self-claimed” expert on pyramid schemes. In fact, regulators around the world have utilized his expertise. The Federal Trade Commission has received training from him. FitzPatrick has also testified in state and federal courts as an expert witness on pyramid schemes.

In addition, the civil complaint contains numerous unsubstantiated statements that the FDI findings were wrong. The company provides no basis for the assertion that the statements were false. Medifast says that following the release of the first report on Medifast Inc., the company “… issued a press release refuting all of Minkow, FDI, and FitzPatrick’s false allegations.” The press release didn’t actually refute much, other than to say their products are safe, that the company’s revenue is not primarily made from recruiting new coaches, and that the company’s growth isn’t really related to recruiting. Medifast hasn’t actually demonstrated how any of the detailed findings in the report are false, even though they presumably have in their possession all the data and documents that would allow them to do so.

Sam Antar, the former CFO of Crazy Eddie (and a convicted felon and excellent forensic accountant) questions why Medifast hasn’t actually gone through all the allegations and publicly refuted them. Shouldn’t that be an easy thing to do?

Medifast’s complaint also has several instances of false descriptions of the reports and blog postings about FDI’s findings in their investigation.  For example: I am accused of stating that Medifast’s auditor has a conflict of interest because BJL Wealth Management (an investment firm at the same address as the auditor) recommended the purchase of Medifast stock to someone. In fact, I detailed in my blog posting only what would and would not constitute a conflict of interest, and I did not give a conclusion on the Medifast situation.

The complaint also falsely states that I wrote that “…Medifast is not complying with some unknown and undisclosed legally mandated reporting requirements.” Again, I said no such thing. In the blog posting Medifast referenced, I actually said:

“We’ll never know for sure, as Medifast doesn’t disclose how much money the coaches are making, how much they spend on expenses of the business, what their attrition rates are, or how many recruits are actively selling or recruiting.”

The attorneys may want to consult a dictionary for the definition of the word disclose.  I said nothing about reporting requirements, only that the company doesn’t publicly release these statistics which might help investors and potential recruits evaluate the company’s Take Shape For Life (TSFL) “opportunity.”

There are plenty of other examples of false statements and misleading characterizations of the reports and press releases in Medifast’s civil complaint against us, but I’ll leave those for our day in court. Isn’t it a bit ironic that Medifast is filing suit because we were allegedly lying about them, but they are telling lies in the first court filing in the case?

Barry Minkow publicly responded to the lawsuit by saying:

“the bigger picture here is intimidation against the little guy who would dare come out with truthful information and question the practices of public companies.”

He also said that the investigation will be restarted, and the “Medifraud” website detailing our investigative findings would be put back online:

Minkow said the institute will repost the Medifast report and restart its investigations of the company. “It’s on now more than ever,” he said.

I eagerly await our day in court, and I am not intimidated by this lawsuit.