Forbes is reporting on the Usana Health Sciences investigation by Barry Minkow and company, and things aren’t looking good. In an article entitled “Hard to Swallow,” Forbes writer Evelyn Rusli methodically demonstrates the dim reality facing Usana and the Myron Wentz gang.

As Rusli points out, the company seemed “untouchable” as recently as February. The stock was nearing an all-time high and Usana was ready to report the 19th consecutive quarter of record sales.

And then came Barry. On March 15, Usana reported that it was being “informally” investigated by the Securities and Exchange Commission. The problems have snowballed since then.

Usana’s basic defense to all fraud claims has been “Barry’s a liar.”

“We believe everything he says to be false,” Usana spokesman Joseph Poulos told Forbes.com. “He’s a liar; he’s a criminal–he can’t be trusted.”

The company has not produced anything substantive to refute the original report or the subsequent reports and revelations. The responses by Usana get even wackier… suggesting that Barry is part of a naked short selling conspiracy. Usana executives apparently think if they keep screaming “he’s lying” loudly enough, everyone will forget that they can’t refute anything of substance. (Oh wait, I think they correctly pointed out that there was a speck more of grape seed extract in their product than the independent laboratory tests found. Score one for Usana. Grape seed extract must be what it’s all about.)

Barry Minkow, Fraud Discovery Insitute, and several well-respected experts (including Robert FitzPatrick, Dr. Jon Taylor, Attorney Doug Brooks, me, and others) are revealing the truth about Usana, and its stock has dropped over 40% since March.

Barry voluntarily revealed in the original report that he had purchased put options on Usana, which are essentially a bet that the stock price will fall. He says he hasn’t profited from the puts and that he never engaged in naked short selling.

Forbes highlights the alleged problems with the Usana business:

• It’s a pyramid scheme which leaves almost all of its 178,000 distributors with financial losses.
• Distributors must purchase products in order to be eligible for recruiting commissions. They’re not really purchasing the products. “…they’re ponying up the cash to participate in the profit-sharing network, which each can do once they’ve roped in two new recruits.”
• The products are overpriced, even at wholesale price to the distributors, so a real retail customer base of any size is next to impossible for distributors to establish.

Usana has failed miserably at defending itself against claims of being a product-based pyramid scheme that costs distributors money. Even though the company has a slogan of “true health, true wealth,” Usana executives now say most distributors don’t join to earn money. Even though recruiting pitches are focused on the money that could be made in the scheme, Usana says only a small percentage really want to make any money.

The company goes on to pretend that its vitamins are of higher quality than the products in retail outlets, justifying the sky-high prices. Anthony Almada, chief scientist at Imaginutrition (a consulting firm for supplement producers), says that Usana’s vitamins aren’t special even though MLM companies often make such claims.

One of the recent problems at Usana involves the resignation of their independent auditors, Grant Thornton. Usana executives would have people believe that this was no big deal, and maybe even a good thing for Usana. In reality, the resignation of a company’s auditor during an SEC investigation is very troublesome. It appears that the auditors suggested increased scrutiny of Usana and the financial statements, and company executives declined.

Naturally, the company says that the executives believed that they’d done enough investigation of the allegations. The auditors obviously disagreed.

Then, of course, there were the issues with the credentials of the company executives and representatives. This ranged from the non-existent Masters Degree of Denis Waitley, to the non-existent medical license of Ladd McNamara, to the falsely claimed CPA credential by CFO Gil Fuller and board member Jerry McClain. Usana’s basic defense to these items is that other companies misrepresent credentials as well.

Forbes also looked at Usana’s loan covenants with Bank of America. The consolidated funded debt was calculated around $65.7 million for a ratio of about 3.6-to-1 for the second quarter of 2007. This might represent a violation of the covenants, according to Forbes and a banking expert witness, which could result in Bank of America calling the loan.

It’s not looking good, boys. But I suppose you can continue to claim Barry is lying. That seems to have worked pretty well up to this point. Not.