Last week the Securities and Exchange Commission (SEC) informed Usana Health Sciences (NASDAQ: USNA) that it was closing its informal investigation into the company and taking no further action at this time. The pro-MLM camp has trumpeted this as a complete victory for Usana, proclaiming that the SEC basically said their business structure was completely legal and all was rosy at the company.

What does the letter from the SEC to Usana really mean? It means that the SEC is closing their investigation for now. Nothing more, and nothing less.

It is certainly not a vindication for Usana. While the company and its executives can celebrate the fact that the investigation is currently closed, that doesn’t mean they’re operating by the book or they’ll get a pass into infinity.

What this really means is that the SEC did not have enough to warrant moving their investigation of Usana from the informal phase to the formal phase. But I still believe that Usana is committing a serious fraud against its shareholders and distributors. Could they be committing fraud even though the SEC closed their informal investigation? Of course!

Agencies like the SEC have guidelines that they must follow in order to open official/formal investigations. They couldn’t possibly investigate every single case that is presented to them. There just aren’t enough resources.

So which cases do agencies pursue? Typically they are the ones that meet one or more of the following:

• Are the most egregious – This might include the ones that cause the greatest losses or involve the most outrageous types of schemes. Sometimes the cases which get attention are the ones that have the most vulnerable victims, such as the elderly.
• Are the most costly – This might include crimes that cause the largest dollar losses or have the greatest number of victims.
• Are the easiest to prove – Sometimes the facts and the evidence in a case are so overwhelming that they are fairly easy to prove.
• Fall into a category that is a current focus of the organization – Law enforcement agencies sometimes focus on certain types of crimes, and may be more interested in cases that fit that current focus.
• Have some other special appeal to the agency.

I see the Usana case this way: The company has made material misrepresentations and has failed to disclose material information to both investors and distributors. Problems have been identified in the following areas, and others:

• Very little actual retailing of product occurs, and Usana won’t disclose how much of their product is actually sold to third party users of the vitamins.
• The product is significantly overpriced in order to pay commissions to multiple levels of the pyramid.
• Usana claims consumers of their vitamins get a 75% savings on them, but even at wholesale pricing, the vitamins cost multiple times the amount of comparable vitamins sold at retail.
• High failure rates guarantee that the vast majority of distributors will lose money in this venture.
• Usana won’t disclose actual turnover and failure rates.
• The top 3% of distributors receive over 70% of the commission paid out, and the bottom 99% of distributors earn just over $6 per week in commissions.
• The business opportunity is really an endless recruiting chain.
• The investment community is not given adequate information about the business model and failure rates in order for them to properly analyze the company and its true value.
• Insiders continue to dump their shares of stock while the company is spending large chunks of available cash to repurchase shares.
• Executives and board members have misrepresented their credentials, including lying about college degrees and lying about CPA licensing.
• Growth in EPS is largely due to the reduced number of shares outstanding, not better earnings.
• The company is illegally conducting business in China.

And more problems likely exist but have not yet been uncovered. I think this is more than enough for the SEC to move forward and take action against Usana, but I have to respect their decision to not do that. I don’t work for the SEC, and I don’t know exactly what kind of criteria they’re using to evaluate the malfeasance of Usana and its executives. I don’t know what kind of threshold the wrongdoing has to cross, so I’m not going to criticize the SEC for not acting right now.

This inaction by the SEC doesn’t mean that Usana is a good company. It doesn’t change the fact that it’s a product-based pyramid scheme that misleads distributors and investors about its business model, its executives and directors, its operations overseas, and the ongoing scam.