SALT LAKE CITY -- Independent distributors filed a proposed class-action lawsuit on Thursday accusing USANA Health Sciences Inc. of fraud and deception, the latest public-relations blow for the marketer of vitamins and nutritional supplements.
The lawsuit against Salt Lake City-based USANA was filed in California state court on behalf of hundreds of low-level distributors in California, one of the company's biggest markets, which has tough multilevel marketing laws.
San Diego class-action lawyer Alexander M. Schack is seeking an injunction stopping USANA from doing business in California. The lawsuit seeks damages for "downline" distributors left with thousands of dollars of losses each after paying for business "kits" and products they said 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, said in an affidavit.
Crane is no ordinary distributor. He was recruited by Dr. Ladd R. McNamara, a USANA figurehead 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 resume flaps involving top executives and sales associates.
Minkow, who started the Fraud Discovery Institute after serving eight years in prison for stock fraud, came out with a 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.
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.
There's no money to be made in multilevel marketing "except for the ones who get in on the ground floor," Schack said in an interview.
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 -- after refunds he said he was out $500.
Gil Fuller, USANA's senior vice president and chief financial officer, didn't return messages left Thursday by The Associated Press. Instead, the company issued a statement to the AP saying 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.
"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, closed at $43.16 on Thursday, down 25 cents.
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.
On the Net:
USANA Health Sciences Inc. www.usana.com
Fraud Discovery Institute: www.frauddiscovery.net
This story appeared in The Daily Herald on page D6.