San Diego 'We have serious concerns about the management," says stock market research firm Morningstar, Inc., about a publicly held company, Usana Health Sciences. "The company is under investigation by the SEC, and scandals about directors and executives lying about their qualifications abound." And that's only part of the imbroglio, which has led to lawsuits, the resignation of the company's accounting firm, the plummeting of Usana stock, and lots of bitter personal denunciations.
Usana is based in Salt Lake City, but the ground fire commenced in San Diego, and two of the executives found to have untruthful biographies are well-known San Diegans.
On February 20, San Diego's Fraud Discovery Institute issued a 500-page, heavily footnoted study of Usana, charging that it is a pyramid scheme. The company hawks vitamins, energy bars, weight-loss products, and the like through a technique called multilevel marketing, which critics like me call pyramid marketing. These companies make their money recruiting new salespeople who pay to get aboard. Actual consumer-product sales are often trifling, and most of the people who shell out bucks to get on the pyramid lose a bundle. Fraud Discovery Institute made that point clearly with Usana.
Among other things, the report charged that 60 percent of active distributors do not earn commissions and 70 percent of commissions go to 3 percent of the salespeople.
Further, the report noted that more than 45 percent of the stock is held on the Isle of Man tax haven by Myron Wentz, company founder, and is in turn controlled out of another tax/secrecy haven, Liechtenstein. Wentz's Isle of Man holdings are a matter of record, but the company denies the Liechtenstein control. Wentz renounced his citizenship in the 1990s and spends most of his time outside the United States, according to Barry Minkow, San Diego minister/sleuth who heads Fraud Discovery Institute, and that's why Wentz's son David, a University of California, San Diego, graduate, runs the company day to day. Usana says it won't comment on any of its employees' estate planning. "Dr. Wentz complies with all relevant tax laws," says the company. But whose tax laws? Minkow believes Wentz is using tax-avoidance strategies and may not have publicly disclosed a past Internal Revenue Service investigation.
When the institute's report came out, all hell broke loose. The Wall Street Journal began doing Usana stories based on Minkow's study. Later, Forbes.com picked up the story. The Securities and Exchange Commission launched its inquiry. The FBI is said to be investigating, but Usana says it doesn't know of any such probe. It has asked law enforcement officials to investigate Minkow.
The company's longtime auditing firm, Grant Thornton, resigned in July. It could not agree with Usana on procedures for an outside, independent investigation of the charges. Because it had no auditor, Usana was late with official government filings and was not in compliance with Securities and Exchange Commission or Nasdaq requirements. On September 5, it hired a new auditor, but Morningstar says, "We are still wary of Usana's management team."
On the day the report came out, Usana's stock was selling for $61.19. The company immediately denounced the study's author as a convicted felon and liar. Minkow hardly refutes the first charge: in 1987 he was sentenced to 25 years in prison for perpetrating a fraud in which 90 percent of reported sales were phony. He doesn't deny his guilt. He got religion, got out of prison in 7 years, and is now senior pastor for Community Bible Church in Mira Mesa. He spends 60 percent of his time saving souls and 40 percent saving people from scams as head of Fraud Discovery Institute.
On March 20, with its stock down to $47.85, Usana filed suit against Minkow and his institute, charging that many of the claims about the company are false. Usana's lawyers hired Kroll, Inc., which with its law firm fleeced San Diego of $20.3 million, to dig up dirt on the accusers. Because Minkow made a market bet that Usana's stock would drop, the company claims that his negative report was intended to manipulate the stock downward, in violation of the California Business and Professions Code. In addition, Fraud Discovery Institute "wrongfully and intentionally acted to interfere with and destroy or harm Usana's existing and prospective business relationships," charges the suit.
Minkow says he made a bet on the stock's decline because he had to recover some of the huge expenses of the study. My own view: if someone publishes a positive report on a company and buys the stock, nobody thinks anything of it. What's wrong with publishing a negative report and betting a stock will go down? The criticism of Minkow "is a bunch of malarkey," says Herb Greenberg, a San Diegan who writes columns for the Wall Street Journal and MarketWatch.com and provides commentary on CNBC. "He has a right to publish his research, as long as people know his position [in the stock]." And Minkow revealed in the report that he is betting for the stock to go down.
Usana blames Minkow's study for four lawsuits filed against the company -- three by investors and one by distributors who lost their shirts. That last suit, which is intended to qualify as a class action, was filed by San Diego attorney Alexander Schack on behalf of San Diegans Jeannette Johnson and Christopher Crane. Among many things, the suit charges that "the company's multi-level marketing model operate[s] as a pyramid scheme," more than 74 percent of company associates fail within a year of joining up, and more than 87 percent lose money. Usana denies those claims.
Among the defendants are Denis Waitley of Rancho Santa Fe and Ladd McNamara of Oceanside. Both Waitley and McNamara use the title "Dr." in front of their names. Both are spellbinding in front of audiences. And both recently left the company because their biographies are untruthful.
"A life lived with integrity -- even if it lacks the trappings of fame and fortune -- is a shining star," preaches Waitley, motivational speaker and author of 15 books with maudlin messages (Being the Best, Psychology of Success, etc.). Waitley's website lists his alleged self-spun aphorisms, although some have a familiar ring, e.g., "I had the blues because I had no shoes until upon the street I met a man who had no feet" and "We've got to have a dream if we are going to make a dream come true." The first is almost identical to an ancient quote credited to Anonymous, and the second is close to a song in the 1940s musical South Pacific.