Judge's order casts uncertainty over Utah direct seller

An administrative law judge with the U.S. Securities and Exchange Commission has ordered the stock registration of Nature's Sunshine Products to be revoked, citing its "recurrent" failure to file audited earnings reports since 2005.

Administrative Law Judge Carol Fox Foelak, in an order issued Thursday, denied the Provo direct seller's request to dismiss the action, saying the company has continued to violate the Securities Exchange Act by failing to "publicly disclose current, accurate financial information ... so that investors may make informed decisions."

Nature's Sunshine, which lost its stock listing on Nasdaq in April 2006 and is now trading on over-the-counter "pink sheets," said it has taken substantial steps to return to compliance and plans to appeal the order.

"We have 21 days to appeal, during which the stock will continue to trade," said Steven Anreder, the company's spokesman. "We do not believe this order or any final revocation order would affect our business operations." Companywide, it has 1,100 workers including 600 in its U.S. offices.

But if its appeal fails, the SEC can issue a final order to revoke its stock registration, and trading of its shares will be stopped. If that happens, "broker-dealers would not be permitted to effect transactions in the company's shares until the company files a new registration with the SEC and that registration is made effective," Nature's Sunshine said in a statement Friday.

The company said Foelak's order will not become final until after a review is held. But it said it "cannot predict the outcome of the appeal ... (and) what, if any, impact the commission's determination may have on its financial statements."

The SEC's Division of Enforcement began administrative proceedings against Nature's Sunshine in July after an investigation found the company failed to file its Form 10-K annual earnings reports since March 16, 2005, and its audited quarterly reports since June 30, 2005. The company also disclosed in March 2006 that its financial statements from 2002 onward could not be relied on.

In its action against Nature's Sunshine, the SEC had sought to revoke the company's stock trading for up to a year.

But Foelak, in Thursday's order, recommended that "neither dismissal of the proceeding, as requested by Nature's Sunshine, nor a suspension of registration for a period of 12 months or less is an appropriate disposition."

That's because "the investing public still does not have access to past and current audited financial information, and Nature's Sunshine is currently unable to predict a date when this will occur," she wrote.

Nature's Sunshine hasn't been able to meet the SEC's reporting requirements since KPMG LLC resigned as its auditor in March 2006, and will not until its new auditor, Deloitte & Touche, completes an audit of its financial statements from 2004 through 2006.

"We don't have a date for the audit's completion," Anreder said.

KPMG resigned after it found Nature's Sunshine failed to take adequate remedial action, even after an internal investigation found evidence that Nature's Sunshine CEO Douglas Faggioli knew of an alleged fraud in the company's international operations, and yet signed two letters to KPMG in 2005 stating the contrary.

Nature's Sunshine has since made some effort to remedy its violations. To support Deloitte's audit, Nature's Sunshine has added personnel and consultants and increased the work hours of its staff and also hired Protiviti, a provider of internal audit and risk consulting services, to review its internal controls at its worldwide operations.

Nature's Sunshine also said it has provided to its shareholders preliminary unaudited, unreviewed financial information for the fiscal year ended Dec. 31, 2006, and for the following two quarters. But it said this information will likely be restated once the audit is done.

The company is subject of an ongoing class-action lawsuit over alleged insider trading and securities law violations. Nature's Sunshine and three executives are accused of filing misleading Sarbanes-Oxley Act certifications between March 16, 2005, and Nov. 22, 2005, and false Form 10-Q earnings with the SEC to elicit "clean" audit reports from KPMG. This case is now in discovery.

The company is also being audited by the Internal Revenue Service. The IRS, in early 2006, began an audit of the company's income tax returns for the years 2002 through 2005.

Shares of Nature's Sunshine dipped 10 cents or 0.83 percent on Friday to close at $11.90.

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