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.

Family Lawyer Magazine: Digging Deeper Into Lifestyle Analysis

family-lawyer-magazineWritten by Tracy L. Coenen, CPA, CFF

Family Lawyer Magazine
2013 Print Edition

A thorough lifestyle analysis can help discover undisclosed income and assets.

digging-deeper-lifestyle-analysisIn an ordinary lifestyle analysis, the divorce financial analyst extracts all of the transactions from bank, brokerage and credit card statements, categorizes them and calculates totals for each category for the period under analysis. This is an important exercise to assess what the parties to a divorce have historically spent and determining an appropriate level of support. It can also be used to determine whether a spouse was wasting or dissipating marital assets.

More importantly, the lifestyle analysis can also be used to uncover hidden income and assets, or help prove that one spouse is living a lifestyle that exceeds the reported sources of income. The typical lifestyle analysis may only scratch the surface of the financial facts of the case, leaving behind important clues about the finances of the parties. Diving deeper can uncover hidden finances that may have otherwise been overlooked.

Using the Net Worth Method of Proof in Divorce Cases

In divorce cases, forensic accountants can use the “net worth method of proof” to calculate income. This is used to search for hidden or unreported income. Rather than simply taking a spouse’s word for it that his or her income is X, we can do an analysis like this to try to verify the claimed income.  This method of proof is one part of a lifestyle analysis, in which we are analyzing the party’s lifestyle and determining if that lifestyle matches the income that is being reported. This video explains the process of completing a net worth analysis.

Losing Money in Herbalife

I talk frequently about how almost everyone loses money in multi-level marketing schemes. Companies like Mary Kay, Herbalife, Amway, and Avon want you to believe that money is being made from retailing the products. They say they are not pyramid schemes because they have legitimate products that can be sold for a profit.

Unfortunately, almost no one profits from MLMs, and certainly not from the sale of MLM products. Why? Because there is only a tiny market for bona fide retail sales. Very little actual retailing of products occurs. The vast majority of the “product sales” are from the MLMs to their distributors, rather than third-party consumers.

But the companies have a vested interest in getting consumers to believe their lies. If consumers didn’t believe the products were being retailed, they’d never sign up as distributors. Oh sure, some retailing goes on. But it is a very small amount, and is usually not at full retail price. Mary Kay says it’s simple: Buy a product for $1 and sell it for $2. You’ve doubled your money! But it’s nearly impossible to sell at full retail pricing, especially when tens of thousands of products are being dumped on eBay at or below wholesale pricing.

Is a Damages Expert Required?

Damages experts are a routine part of litigation, as the issue of financial losses is often complicated. A variety of subject matter experts and financial experts are a standard feature in litigation to sort out the issues and help judges and juries understand the numbers. But what if there is no damages expert? Can a proper award of damages be made?

In an opinion issued this spring, a judge in federal court in the District of New Jersey granted defendant’s motion for summary judgment on plaintiff’s claim for damages.

Unicom Monitoring, LLC was granted summary judgment its patent infringement claims against Cencom, Inc.  The plaintiff alleged that it could prove the revenue and profits earned by Cencom related to the infringement, and the reasonable royalty that Unicom was entitled to because of the infringement.

Mind the Expectation Gap (Guest Post at FEI Financial Reporting Blog)

auditor-expectation-gapYesterday Financial Executives International (FEI) ran a guest post by me on their Financial Reporting Blog. The introduction is below, and you can read the entire article about the expectation gap between auditors and the users of financial statements here.

One of the greatest problems with the process of traditional financial statement audits is the expectation gap, which is commonly defined as the difference between what auditors do and what the clients, investors or the public expects.  There are also gaps in understanding as to the role of other parties in the financial reporting supply chain, including financial executives, internal auditors, and audit committee members, and how those parties interact with auditors and each other, and the public’s expectations thereof.

[snip]

Let’s look at the first part of the Expectation Gap,  that between auditors and their clients. The audit engagement letter and other pieces of correspondence from the auditors to the client state that the company is responsible for preventing and detecting fraud. In spite of this, management often points the finger at the auditors for failing to uncover a fraud scheme.

Divorce Investigations: Finding Income and Assets in an Income Tax Return

tax amnesty programThis article was originally printed in the ABA Section of Family Law eNewsletter, July 2013.

While consumers generally hate income tax returns because of their complexity, they can be invaluable sources of information in divorce proceedings. Not only do they provide insight into prior years’ earnings, they can also point to assets and sources of income. They may be used to unearth financial information that a spouse omitted from the financial disclosures, and can hold subtle clues to otherwise unknown financial details.

For example, assets are sometimes sold by the spouses to generate cash. Many times this may be a taxable transaction reported by the purchaser to the taxing authorities. Therefore, such a transaction will be required to be reported on the income tax return, and this may help unearth a hidden asset or provide clues to concealed cash.

Expert Fraud Investigation
Divorce Investigations
CPA's Handbook of Fraud and Commercial Crime Prevention
Essentials of Corporate Fraud
© 2013 Sequence Inc. Forensic Accounting. All rights reserved. View our privacy policy here.