Vitamin Marketer USANA Hit With Proposed Class-Action Lawsuit

June 27, 2007

Independent distributors have filed a lawsuit accusing USANA Health Sciences Inc. of fraud and deception, the latest public-relations blow for the marketer of vitamins and nutritional supplements.

The lawsuit, which seeks class-action status, was filed in California state court on behalf of hundreds of low-level distributors in California, which has tough multilevel marketing laws.

Veteran San Diego class-action lawyer Alexander M. Schack is seeking an injunction stopping Salt Lake City-based USANA from doing business in California, one of the company’s biggest markets. The lawsuit seeks damages for “downline” distributors left with thousands of dollars of losses each after paying for business “kits” and products they say they couldn’t sell at inflated prices.

“Despite a diligent effort consisting of time, money and energy, my USANA business failed miserably,” Christopher Crane, the 23-year-old lead plaintiff, says in an affidavit.

Crane is no ordinary distributor. He was recruited by Dr. Ladd R. McNamara, who quit the company’s medical advisory board last month after The Wall Street Journal reported his medical license had been suspended in Georgia and Ohio. Crane is a childhood friend and one-time roommate of McNamara’s son.

USANA has come under attack by a San Diego investigator, Barry Minkow, for its network marketing business model, once-soaring share price, and series of flaps involving the credentials of top executives and sales associates.

Minkow, who served eight years in prison for stock fraud and later started the Fraud Discovery Institute, came out with his first critical report on USANA in February when he bought “put” options on USANA’s stock in a bet the price would fall. USANA has sued him for defamation.

Minkow’s reports have spurred a legal assault against USANA with eight law firms competing for the right to represent stockholders in another proposed class action. Schack’s is the first proposed class-action filed on behalf of money-losing distributors.

USANA said in a statement that the lawsuit was without merit
“and relies on false claims made by a stock fraud felon who stands to profit from a decline in USANA’s stock price.”

The lawsuit alleges USANA failed to disclose “material adverse facts” to recruits, notably that 87 percent of active distributors are losing money and that the company’s business model amounts to a pyramid scheme requiring a constant churn in the sales force, according to court papers.

Crane said he couldn’t sell the vitamin and mineral formulations at USANA’s prices, couldn’t consume the monthly supplies himself and was forced to give away samples to sales prospects. His total investment was $3,500, and after refunds he said he was out $500.

“USANA will defend its strong and growing company against these false claims, and its management and legal team are confident that the company will prevail in any potential litigation that may arise based upon these false claims,” the company said.

USANA shares, which peaked at more than $60 earlier this year, fell 25 cents to $43.16 last week.

The company was started in 1992 by Dr. Myron Wentz, the chairman and CEO, and counts an army of more than 140,000 distributors worldwide.

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