Nature's Sunshine Products Inc. and three executives are embroiled in a class action that alleges they falsified financial statements to its auditors and federal regulators -- costing shareholders millions of dollars in damages.

Five shareholders sued Nature's Sunshine, its president and CEO Douglas Faggioli, former CFO Craig Huff and Franz Cristiani, former chairman of the audit committee, in a consolidated class action lawsuit filed earlier this month in U.S. District Court in Salt Lake City.

Steven Anreder, spokesman for Nature's Sunshine, said the company has hired an attorney and plans to "vigorously defend against this lawsuit."

The defendants are accused of filing misleading Sarbanes-Oxley Act certifications, Form 10-Q quarterly earnings reports and press releases with the U.S. Securities and Exchange Commission to illicit "clean" audit reports from its former auditor, KPMG LLP. The defendants haven't been charged with any criminal violations to date.

"Typically, class actions don't put companies out of business. It's designed to compensate shareholders for the alleged fraud," said Phillip Kim, lead counsel for the plaintiffs, with the Rosen law firm in New York. "The company also voluntarily stated in SEC filings it had engaged in illegal activities related to the financial statements and that these illegal activities are serious enough to warrant notifying government authorities like the SEC and the Department of Justice."

The company, which hasn't filed any financial statements for more than a year, hasn't determined the exact amount of errors in the financial statements, nor has it determined the periods to which they relate.

Since February, when the company admitted its financial statements from 2002 through 2005 should not be relied on, its stock price has lost nearly half its value, and the company was delisted from Nasdaq in April.

Shares of Nature's Sunshine, now trading on over-the-counter "pink sheets," closed Tuesday's trading session at $11.20, up 35 cents. It had reached a one-year high of $20.06 before its delisting. Companies that trade on the Pink Sheet exchange do not have to report to the SEC or any other regulatory body.

The suit alleged the false financial statements enabled the defendants to sell millions of dollars worth of stock between April 23, 2002, and April 5, 2006, at artificially inflated prices.

Huff made about $1.47 million selling more than 84,010 shares of company stock in what the suit calls "suspiciously timed" deals. Faggioli made $2.15 million selling more than 108,454 shares of stock, which "constituted a significant profit compared to his costs basis," the suit said.

KPMG resigned as its auditor after Nature's Sunshine failed to take adequate "remedial action" despite an internal investigation that uncovered these "control weaknesses" in its top management.

Faggioli, who stepped down as president and CEO in March, was reinstated in August despite the fact that KPMG had recommended his termination due to his involvement in potential criminal activity.

KPMG's investigation found electronic evidence showing Faggioli knew of an alleged fraud in the international operations of the company and yet signed two letters to KPMG on March 15, 2005, and August 5, 2005, stating the contrary, said KPMG in a March 31 letter to Nature's Sunshine's board.

He was also accused of approving a payment in violation of the Foreign Corrupt Practices Act. The company has yet to disclose the specifics of this allegation, Kim said.

"We understand the investigation of Mr. Faggioli is continuing with respect to the transfer tax plan, design and approval of bonuses with reference to the tax plan, and the termination of Jeff Hill, the former corporate controller of the company," the suit said, citing a March 27 letter from KPMG to the company.

The suit also alleges the defendants were engaging in a cover-up because they had postponed hiring new auditors since KPMG's resignation and restating its financial statements for the first three quarters of fiscal 2005, 2004, 2003 and 2002 as well as its annual report for fiscal 2004.

The company also tried to cover up the fact that Huff was terminated because of the fraud when they claimed in SEC filings he resigned to "pursue other interests," the suit said.

Cristiani was removed as chair of the company's audit committee because the KPMG investigation found he was aware of an alleged fraud that, in his words, "could be considered material from an auditing standpoint and could pose a significant problem to our company," the suit said. But he failed to notify KPMG of these allegations, or to correct the inaccurate representations made to KPMG.

Anreder disputed the allegations, saying "we believe we have meritorious defenses."

Grace Leong can be reached at 344-2910 or gleong@heraldextra.com.

This story appeared in The Daily Herald on page A1.