The following is a Market Wave Alert from Len Clements:

The Wall Street
Journal today published a summary of an
86 page
report by the Fraud
Discovery Institute (FDI) which alleges
that the public company Usana Health Sciences
(NASDAQ:USNA) is guilty of “multiple alleged
misrepresentations, material non-disclosure
and an untenable business model.”

The FDI is directed by Barry Minkow, who
spent almost eight years in prison after
being convicted on 57 counts of fraud and
conspiracy in the 1980s. He now assists the
SEC in uncovering securities fraud.




According to Minkow, Usana is in violation of
SEC disclosure law because they do not
disclose that:

1.  Usana’s products are “hopelessly
overpriced” and only 14% of company revenue
comes from retail sales;

2.  No less than 85% of current distributors
are losing money, and at least 74% will fail
within their fist year of business;

3.  Only 3% of Usana distributors receive 70%
of all commissions and bonuses;

4.  Usana Founder and Chairman Dr. Myron
Wentz, the majority stock holder, renounced
his United States citizenship and
“misrepresents the location of the entity
that owns 46% of Usana stock” – which,
allegedly, is the tax-haven country of
Liechtenstein.

5.  Wall Street analysts who follow Usana
continue to rate the company highly and recommend
their stock only because
they, like Usana reps and investors, are
failing to understand the “below the iceberg”
effects of Usana’s financial data;

6.  Usana, as a multilevel marketing company,
has an “untenable” (so poorly designed as to
be indefensible) business model which is
based on the perpetual turnover of failed
distributors. Thus, Usana is destined to
collapse due to market saturation.

According to the FDI report, if Usana
distributors were adequately informed of
these issues “Usana’s ability to attract new
distributors would be materially adversely
effected, which appears to be why they have
chosen not to disclose any of these facts.”

To review the entire FDI report, go to: http://www.frauddiscovery.net/usanapr.html

Before the work day was even over Usana had
filed a defamation law suit against Barry
Minkow and the FDI.  Usana alleges that Mr.
Minkow’s statements are “part of a
coordinated public relations program financed
by a paying client and from which Mr. Minkow
will profit personally.” According to The
Wall Street Journal article, Mr. Minkow
"…has bought ‘put’ options on Usana’s
shares” (which an investor does when they
expect the stock price will fall). Usana
claims Minkow has admitted to being paid to
conduct his "investigation" against Usana.
They go on to state, "Usana believes this is
a campaign to manipulate Usana’s stock price.”

To review the entire Usana response, go to:
http://biz.yahoo.com/bw/070315/20070315006293.html?.v=1
            

Commentary:

I’m still poring through Mr. Minkow’s
cringe-worthy anti-MLM manifesto (and it is,
indeed, anti-MLM, not just anti-Usana), but
from nothing more than the two page press
release issued by the FDI I could tell that
this diatribe was going to be little more
than a regurgitation of the same, tired,
completely discounted attacks made by
Anti-MLM Zealots Robert Fitzpatrick and Jon
Taylor. And so far it is. And there’s a good
reason for it. Fitzpatrick is the FDI’s
“retained expert” (and introduced as “widely
recognized as the leading expert on
multilevel marketing”) and is referenced ten
times within the FDI report. Jon Taylor’s
contribution to this report is described just
as ironically as being “significant due to
his ability to interview past and present
Usana distributors to formulate more accurate
conclusions.”

To appreciate the irony of these
descriptions, please read the pertinent
sections of the “Anti-MLM Zealot” article series
at MarketWaveInc.com.

Minkow does disclose that the FDI is a
for-profit business. He sells, among other
things, a DVD called “Frauds Gone Wild” (a la
“Girls Gone Wild”). He claims he has never
charged any victims of fraud for his
services, which, before this egregious
misstep, are otherwise commendable. While his
motives here may be sincere (a jury will
decide), he certainly got himself and his
products a lot of free publicity with his
Usana report, and Usana’s stock, which has
risen over 1,600% since early 2002, fell over
15% today. Someone with “Put” options on
Usana stock stands to make a bundle. Perhaps
someone who was ordered to pay $26 million in
restitution to his own fraud victims?

There’s also plenty of other suspects when it
comes
to who would like to see Usana’s stock price
fall. A relatively high 12.9% of all Usana
stock is shorted (another investment
technique where one makes money by a stock
price dropping).

Interesting side note: Usana’s lead attorney
in their defamation suit is Mr. D.J.
Poyfair.
I’ve worked on a case with Mr. Poyfair a few
years ago as an MLM expert witness. He’s the
prosecuting attorney that put Mike Tyson in
prison. His nickname in legal circles is “The
Terminator”. Usana isn’t fooling around.

In direct response to each of the six points
listed above:

1.  In Fitzpatrick’s anti-MLM works he often
times inadvertently debunks his own
arguments. Minkow’s commentary regarding
Usana’s overpriced products has Fitzpatrick
written all over it. Let’s assume the 14%
retailed rate is accurate (how anyone would
know the volume of products resold by
distributors, or the number of customers who
enrolled as distributors just to purchase
products at a lower price, is never revealed
by any anti-MLM zealot, nor is it here). This
would then mean that Usana moved over $62
million of their “hopelessly overpriced”
products last year at retail!  And
this isn’t
even including those who enrolled just to pay
a lower price, which surely is the majority
of their regular customers.

Two of the “leading experts” in MLM, and one
of the “foremost experts” in fraud
investigation, all somehow seemed to have
missed this. Again.

2.  To know that 85% of Usana reps are losing
money would require a knowledge of all Usana
rep’s expenses. No mention is made as to how
this data was miraculously derived. To know
that 74% will fail would require knowledge of
every Usana
rep’s income goal (what, exactly, is Minkow’s
definition of “failed”?). No mention is made
as to how this data was derived, either.

3.  To know that only 3% of all Usana reps
earn 70% of the commissions paid begs the
question (assuming it’s even true), How did
Minkow discover this if Usana does not reveal
the pertinent data? Did he sneak into their
accountant’s office and microfilm their
books? Did he hack their computer? Or, did he
calculate this from data that, per SEC
regulations, Usana publicly disclosed!

4.  I am not knowledgeable enough in
securities law to comment on the
ramifications of this allegation (see the
Usana response). I am sure of one thing,
though: It has absolutely nothing to
do with
the MLM business model being “untenable”.

5.  As I’ve rhetorically asked here many
times, Isn’t it fascinating how MLM is
“backed by an ex-president” and “defended by
top law firms”, which FitzPatrick
acknowledged in his book. He claims MLM even
has its own caucus in Congress.  Inc.
Magazine, Forbes, Entrepreneur, Success
Magazine, and others, have all published
positive articles about this industry. MLM is
recognized as a legal business model by all
fifty Attorneys General, the FTC, the vast
majority of the House and Senate, and many
state and federal courts, and has been for
decades – not to mention the SEC and the
several hundred thousand investors in MLM
companies. Yet, FitzPatrick, and now Minkow
it appears, believes they’re right, and
all
of the above are wrong! The majority of the
three largest U.S. based MLM company’s sales
are outside the U.S. – so apparently we’re
not only fooling Usana stock analysts, we’ve
bamboozled the citizens, courts, and
regulators in over 60 other country too!

6.  It’s even more fascinating that there are
still people in this country that believe the
Earth is flat, the Moon landing was faked,
and after 71 years of MLM existence, with
companies like Usana which has had record
growth for 18 consecutive quarters after
being in business for almost ten years, all
MLM companies must die an inevitable death of
saturation.

Mr. Minkow notes that he just started looking
into the MLM business in 2003. It shows.

I’m sure there will be much more to come on
this one. Stay tuned.

Len Clements
MarketWave, Inc.

P.S. For the record, I have never owned Usana
stock nor have I ever been a distributor for
Usana.