As stocks plunge, Usana sues Minkow over report

After watching its stock plunge 15 percent on Thursday, UsanaHealth Sciences filed a defamation lawsuit against Barry Minkow, aSan Diego resident, who has claimed that the Salt Lake-based multi-level marketing company is little more than an over-priced pyramidscheme.

In a complaint filed Thursday in U.S. District Court in Salt LakeCity, Usana charges that Minkow authored and published a report"calculated to defame Usana and lower its stock price, so as toallow Minkow to benefit from his short position in Usana's publicly-traded stock."

Minkow distributed a 500-page report to officials at the U.S.Securities and Exchange Commission, the Federal Bureau ofInvestigation and the Internal Revenue Service.

The Wall Street Journal picked up the story, running it Thursdayon the cover of its Money & Investing section.

That helped to fuel a sell-off of Usana's shares, which closeddown $8.92 at $49.85 Thursday on the Nasdaq Stock Market. On Friday,Usana shares lost another 60 cents, or 1.2 percent, to $49.25.

"Minkow is simply looking to line his pockets based upon ahodgepodge of misinformation, half-truths and outright lies," saidD.J. Poyfair, an attorney for Usana. "Usana is regularly identifiedas the gold standard in network marketing by state and federalregulators."

Minkow does not deny his stock interest in Usana. In fact, hesaid he disclosed his short position -- 225 put options -- in aletter to Usana that accompanied his report.

Usana issued a statement Friday saying that Minkow's campaign wasfinanced by a paying client and Minkow will profit personally.

Minkow charges that Usana's senior management and directorsexercised $95 million in stock options even as the companyauthorized $140 million in stock repurchases.

"None of that is illegal," Minkow said. "But where did they getthe $140 million? From the people that they lied to and told thatthey were going to succeed in this multi-level marketing business.That's wrong. That's evil."

Minkow alleges that 85 percent of current Usana distributors arelosing money and 74 percent of distributors fail within the firstyear.

"These distributors account for 86 percent of the company's multi-level marketing revenue," Minkow said. "In today's Internet economy,there is simply no need for multi-level marketing or the overpricedproducts that they sell, meaning that the only thing they areselling are memberships in anticipation that future memberships willbe sold in the future, which is the classic definition of a pyramidscheme."

Usana says that nearly 80,000 people have signed up to be so-called "preferred" customers and do not participate as businessassociates.

"Usana business associates are under no obligation to purchaseany amount of products beyond a $20 starter kit," the company saidin a statement. "Usana's business model is dependent on consumptionof its nutritional products, not the recruitment of associates."

Minkow's past includes a conviction for stock fraud in ZZZZ Best,a rug cleaning business that he started in the early 1980s.

Since serving nearly eight years in prison, Minkow has turned hisattention to fighting fraud. He claims to have uncovered 17 majorfrauds, totaling more than $1 billion.

"I was one of the first bad CEOs," Minkow said. "Before there wasKenneth Lay and Bernie Ebbers, there was me."

Now his attention is focused on Usana, which, he charges, is a"financial crime in progress."

But Usana maintains Minkow's report has misrepresented numerouslaboratory reports of its products and is "riddled withexaggerations, half-truths and plainly false statements."

"These false statements are designed not only to devastate Usanaas an entity, its products and all of its distributors," the companysaid in a statement, "but also to line Mr. Minkow's own pocketsthrough a strategy that is the opposite of the classic pump-and-dump: here a 'distort and short."'

E-mail: danderton@desnews.com