On September 18, 2013 a cease and desist order was filed pursuant to the Security and Exchange Commission’s investigation of Medifast Inc. (Medifast’s business includes Take Shape for Life, or TSFL, which is its multi-level marketing division.) Medifast materially overstated income and understated expenses from 2006 through 2009, according to the SEC. This has resulted in the cease and desist order, and has Medifast paying a $200,000 penalty to the government.
You may recall that Medifast sued several people (including me) in 2010 for criticizing their business model and business practices.
One of the issues in the lawsuit was the criticism of Medifast’s auditors, Bagell, Josephs, Levine, and Company.The criticism of the auditors was grounded in a 2008 PCAOB report on an inspection of six of BJL’s audits, which turned up audit deficiencies in three of them. In 2010 Medifast switched auditors.
In 2010, Medifast restated its financial statements for 2006, 2007, and 2008. The restatement was necessary because the company had improperly accounted for the income tax provision in those years, overstating its net income. The company is accused of improper accounting that did not comply with GAAP, and deficient internal controls that did not ensure accurate financial reporting. And their auditors were none the wiser.
After the restatement, Medifast hired the new auditors, who identified more errors in the company’s accounting. Financial statements for 2008 and 2009 had to be restated to correct material misstatements of revenue and expenses. (If you’re counting, 2008 had two restatements.)
On January 13, 2010, I wrote an article entitled “Medifast Continues to Mislead Shareholders.” This made Medifast angry. In Medifast’s lawsuit, the defendants were accused of making the false statement “… that TSFLS’s growth is unsustainable and therefore Medifast’s reporting to its shareholders is false and misleading.”
How interesting is it that the company’s financial statements were materially misstated for several years? Wouldn’t materially misstated financial statements indeed be misleading to shareholders? It would appear that the statement originally made by the defendants was never false.
As a side note on the issue of whether TSFL’s growth was unsustainable… Check out the company’s revenues: You see that in 2009 and 2010 (the time around the FitzPatrick reports and the Medifast lawsuit filing), the revenue growth was north of 50%. Yet in 2011 and 2012, the revenue growth was under 20%. Does that tend to show that FitzPatrick was right when he said that Medifast’s growth was unsustainable????