Expert in Koss Case Blames Michael Koss and Management for Fraud

It has been almost four years since the massive fraud committed by Sujata Sachdeva against her employer, Koss Corp., was uncovered. A year after the discovery, Koss sued Park Bank for failing to find the fraud.  The company says that Park Bank should have known that a fraud was occurring when Koss employees with proper authority withdrew funds from the Koss bank account and had Park Bank make out cashier’s checks with the funds. Koss says that Park Bank should have realized that the endorsements on the cashiers checks did not match the payees. (For example, a cashier’s check made out to N.M. was endorsed by Nieman Marcus.)

If you know anything about fraud, you know how absurd these claims are. It is the company’s responsibility to prevent and detect fraud. This is not the first time that the company made silly claims against parties it was suing in order avoid taking responsibility for Michael Koss’s own mismanagement of the company. Mind you, the company was sanctioned for its own part in the fraud, including lack of oversight, inadequate accounting controls, failure to reconcile accounts, and failure of Michael Koss to review figures before certifying the financial statements.

Article on NuSkin Fraud in China

Today Citron Research released a report on the fraud being committed in China by Nu Skin Enterprises. NuSkin is a multi-level marketing company based in Utah, and it trades on the New York Stock Exchange under the symbol NUS. This report is a follow-up to an August 2012 report in which Citron revealed its basis for alleging that Nu Skin was perpetrating fraud in China.

Citron first points out how dependent on China Nu Skin is.  In the second quarter of 2012, revenues from China were $57 million. In the second quarter of 2013, Nu Skin’s China revenue grew to $197 million. That’s a 245% increase. Without the China revenue, NuSkin’s year-over-year growth would be negative.

An expose was published in China on NuSkin. A translation of the page can be found here. The article accuses Nu Skin of running a pyramid scheme, using endless chain recruitment to bring new marks into the fraudulent business opportunity. Distributors are encouraged to buy inventory in quantities they will never sell, all to move up in the pyramid and qualify for commissions. (Incidentally, this is the same way that Mary Kay Cosmetics has been successful.)

Mark Cuban Wins Big Against the SEC

Almost four years ago, I wrote an article for AOL’s Daily Finance site about the Securities and Exchange Commission witch hunt against Mark Cuban.

The SEC filed insider trading charges against him in 2008 after he sold 600,000 shares of stock in Mamma.com. They said that he was insider trading because he sold his shares after receiving information that there was going to be another offering of stock by the company.

Mark Cuban didn’t ask for the information on the stock offering. It was provided to him because the company wanted him to invest more money. He didn’t want the information, and he knew that it would devalue the stock he already held. So Cuban declined and sold his stock. The stock then dropped in value, and in ran the SEC.

Medifast Cease and Desist Order and Civil Penalty

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.

Citron Research: Usana Health Sciences Operating Illegally in China

usana-health-sciences-chinaAllegations of cheating in China are nothing new for Usana Health Sciences (NYSE: USNA).  In 2007, the Fraud Discovery Institute accused Usana of doing business illegally in China.  The country has very strict laws against multi-level marketing (MLM). It is strictly forbidden. Yet for years Usana has been getting around this rule by having distributors from mainland China do business through Hong Kong, where MLM is legal. When asked about the activity in Hong Kong versus China, the company has been deliberately vague.

In November 2012, Citron Research published a report on Usana’s activities in China. The report discussed law enforcement activity related to illegal MLM operations. Usana was criticized for not disclosing these material events (arrests and fines for distributors) in its SEC filings.

Is Usana Running an Illegal Pyramid Scheme?

usana-health-sciences-chinaAll good multi-level marketing companies have one thing in common: They fail to disclose enough information to allow consumers and regulators to determine if they are in the business of recruiting or selling products. They disclose just enough facts and figures to make it appear that they are being transparent. But they hide enough information that no one could ever determine definitively if they are running pyramid schemes.

MLMs cleverly avoid the pyramid scheme issue by making it impossible to determine the level of retail sales of products to consumers.  The companies effectively use the technique of plausible deniability: They purposely do not track retail sales, so when the business model is challenged with the assertion that few retail sales occur (and therefore they are recruiting schemes), executives can claim that they know no such thing!

Usana Watchdog has released a report on Usana Health Sciences, challenging the company’s failure to reveal meaningful facts and figures that would allow consumers and law enforcement to determine whether the company is running an illegal pyramid scheme.

Is Multi-Level Marketing a Legitimate Business Method?

pyramid-scheme-mlmDefenders of multi-level marketing (MLM) are often heard saying that it’s a legitimate business method! Even government regulators say MLM is legitimate. And it is true that state and federal governments in the United States generally allow multi-level marketing companies to operate with little oversight. This is despite the fact that structurally and operationally, MLMs are nothing more than pyramid schemes.

Oh sure, the MLMs are careful to use lots of window dressing that makes it appear they don’t violate anti-pyramiding laws. There are even lawyers who whore themselves out to tell owners of MLMs how to “stay legal.” And of course, the massive lobbying on behalf of “direct sellers” and multi-level marketing companies ensures that current laws against pyramid schemes will not be enforced, and that no new laws impeding MLMs will be enacted.

Yesterday the Chicago Tribune ran a piece on multi-level marketing, specifically referring to Herbalife and Fortune Hi Tech Marketing. Typical positive MLM talking points were cited:

Herbalife Under FTC Investigation? Or Not?

ftc-bureau-of-consumer-protectionToday the New York Post reported that Herbalife (HLF) is under investigation by the Federal Trade Commission (FTC), and that has sent the stock price down more than 10%. The newspaper bases this story on a Freedom of Information request done by the newspaper. It says, regarding consumer complaints received by the FTC:

The FTC redacted some sections, saying it didn’t have to divulge “information obtained by the commission in a law enforcement investigation, whether through compulsory process, or voluntarily …”

And The Post says that other complaints by consumers had notes referring to a “pending law enforcement action.”

Are Herbalife and FHTM Similar?

fhtm-herbalifeWith yesterday’s shutdown of Fortune Hi Tech Marketing, consumers have been asking if Herbalife is a similar operation. Last year Herbalife’s business model was called into question by David Einhorn, and then the company was accused of being a pyramid scheme by Bill Ackman.

Naturally, Herbalife denied being a pyramid scheme. Management has repeatedly said that Herbalife is all about selling products, and that the products are indeed selling, so it couldn’t possibly be a pyramid scheme. But according to this (start at 2:00 mark), no one really knows how much product is being sold to actual consumers. To be clear: Herbalife does not track retail sales.

I previously compared Herbalife and BurnLounge, a company shut down by FTC because it was a pyramid scheme. (BurnLounge is currently appealing, but that is a story for another day.) Today we compare Herbalife and FHTM:

Anne Coughlan is Wrong on Herbalife

herbalifeAt yesterday’s big Herbalife investor day, the company paraded around Anne T. Coughlan, a marketing professor at Northwestern University, who proudly proclaimed that Herbalife is not a pyramid scheme. No, it is a legitimate multi-level marketing company.

In July, Coughlan published this paper on Herbalife, concluding that Herbalife is squeaky clean. Let’s be clear. Herbalife paid Coughlan to publish this paper. The paper notes:

This document was prepared with the financial and data support of Herbalife
Ltd.

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