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Daniel B. Scotti (admitted pro hac vice) DREIER LLP 499 Park Avenue New York, New York 10022 Telephone: (212) 328-6100 Facsimile: (212) 328-6101 [email protected] Lead Counsel for Plaintiffs Jan Graham (01231) GRAHAM LAW OFFICES Ambassador Plaza 150 South 600 East Suites 5A & 5B Salt Lake City, UT 84102 Telephone: (801) 596-9199 [email protected] Associated Local Counsel for Plaintiffs
IN THE UNITED STATES DISTRICT COURT DISTRICT OF UTAH, CENTRAL DIVISION
ASHOK KAPUR, Individually and On Behalf of All Others Similarly Situated, CIVIL ACTION NO. 2:07cvl77 DAK Plaintiffs, (Consolidated:2:07cv214TS; 2:07cv280BSJ) V.
USANA HEALTH SCIENCES, INC., : PROPOSED CLASS ACTION MYRON W. WENTZ, DAVID A. WENTZ, GILBERT A. FULLER DEMAND FOR JURY TRIAL Defendants.
AMENDED CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS
Lead Plaintiff Irina Sech, individually and on behalf of all others similarly situated, alleges the following upon personal knowledge as to herself and her own acts, and as to all other Case 2:07-cv-00177-DAK Document 41 Filed 12/03/2007 Page 2 of 30
matters, based upon an investigation by plaintiffs counsel, which included, among other things, interviews of former associates and employees of USANA Health Sciences, Inc. ("USANA" or the "Company") (including employees who worked in accounting, finance, customer service and data management), and review and analysis of. (i) the public filings of USANA, including its filings with the United States Securities and Exchange Commission (the "SEC"); (ii) news articles, press releases, analyst conference calls and securities analyst reports by or relating to
USANA; (iii) pleadings and other court documents in the action captioned Johnson v. USANA
Health Sciences, Inc., Case No. 37-2007-00053808-CU-BT-NC (Cal. Super. Ct.); (iv) reports by, and other materials from, the Fraud Discovery Institute'; (v) legal precedents and statutes concerning illegal pyramid schemes; (vi) SEC filings of certain of USANA's competitors; and
(vii) additional information readily available on the Internet. Lead Plaintiff believes that further evidentiary support for the allegations set forth below will exist after a reasonable opportunity for discovery.
NATURE OF THE ACTION
1. Lead Plaintiff brings this action as a class action on behalf of a class of purchasers of USANA common stock between July 18, 2006 and continuing through and including March
The Fraud Discovery Institute's reports on USANA were the culmination of three years of investigative research. According to the Fraud Discovery Institute, that investigation included: (i) interviewing numerous witnesses; (ii) reviewing and analyzing court records and financials statements; (iii) attending a business opportunity presentation at USANA's corporate headquarters (and secretly taping the presentation); (iv) commissioning Jon M. Taylor, Ph.D, President of the Consumer Awareness Institute, to analyze USANA's multi-level marketing system for similarities to an unlawful pyramid scheme (for his report, Dr. Taylor conducted an extensive investigation of USANA, including interviews with numerous current and former Company insiders); (v) commissioning Robert Fitzpatrick, President of Pyramid Scheme Alert, Inc. (a non-profit, all-volunteer entity that describes itself as "the first consumer organization to confront the abuses and trickery of pyramid scheme perpetrators") to investigate USANA and opine on whether the entity constitutes a pyramid scheme; (vi) commissioning Covance Laboratories, Inc., an independent laboratory, to perform chemical analyses on USANA's products; and (vii) hiring private investigators Expol Limited to investigate the background of Myron Wentz.
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14, 2007 (the "Class Period"), to recover damages caused by defendants' violations of the anti- fraud provisions of the federal securities laws.
2. USANA develops and manufactures nutritional, personal care and weight management products. To distribute and "sell" the Company's products, throughout the Class
Period, USANA utilized a multi-level marketing system -- a chain of vertically-organized, independent distributors, who were referred to as "Associates."
3. Unlike legitimate multi-level marketing companies, USANA operated very much like an unlawful, unsustainable pyramid scheme. As alleged below, USANA was almost entirely recruitment focused and there was very little real demand for the Company's products. USANA
Associates were lured to join the scheme through high-pressure recruiting tactics that promised financial freedom. They joined USANA because they hoped to make money, not because they were interested in using the Company's products. Associates were trained to focus on recruiting new members rather than on selling the Company's products, were forced to make large up-front payments for "training" materials, and were required to make minimum purchases of USANA products on a monthly basis. It was those required purchases that constituted the vast majority of the Company's reported sales.
4. In light of the fact that USANA's products were highly overpriced and there was very little demand by actual end users, most Associates failed within the first few months. As a result, the Company experienced an exceedingly high Associate attrition rate and, therefore, had to constantly recruit tens of thousands of new Associates each year to replace those who had left the Company. Despite the Company's high-pressure recruiting tactics, as the pool of prospective
Associates became saturated, it became increasingly more difficult to recruit new members into
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the scheme. Thus, the sustainability of USANA's business model for the long term was highly questionable.
5. Despite this harsh reality, throughout the Class Period, defendants issued a number of material misstatements and omissions that were designed to and did conceal the true nature of the Company's business and long-term business prospects. For example, defendants concealed the Company's extraordinarily high attrition rate, materially manipulated the reported average income per Associate and falsely represented that sales growth was the result of great
"enthusiasm" for the Company's products when, in fact, the bulk of the Company's revenues represented mandatory purchases of products that Associates had no desire to use personally and little hope of reselling. Significantly, USANA's Associate attrition rate was the topic of regular reports distributed to, and weekly meetings amongst, the Company's most senior management; nevertheless, defendants chose not to share this material information with the investing public.
6. Defendants further concealed that the Company's business model and practices shared many characteristics that are often associated with unlawful pyramid schemes, including that: (i) there was very little retail demand for the Company's products by end users; (ii) the
Company was recruitment focused, not product focused; (iii) Associates were required to pay large entry fees; (iv) Associates were required to make minimum purchases of product on a monthly basis; (v) Associates were rewarded for recruiting new members into the chain; (vi) the vast majority of associates failed and only a handful of people at the very top of the pyramid were profitable; and (vii) the Company employed high pressure recruiting tactics that promised enormous financial success.
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7. As a result of these false statements and material omissions, USANA common
stock traded at artificially inflated or distorted prices throughout the Class Period, trading as high
as $61.80 on February 21, 2007.
8. The Individual Defendants took advantage of the artificial inflation in the price of
USANA's shares -- and the effectiveness of their materially false statements and omissions -- by
selling tens of thousands of shares of their privately-held USANA stock, for total proceeds in
excess of $7.6 million. Defendant Myron Wentz's reported sale of 85,000 shares (for proceeds
of more than $5.1 million) was particularly suspicious because of its proximity to the Company's materially false and misleading February 6, 2007 press release and the five-year high in the
Company's stock price. Moreover, as further evidence of defendants' fraudulent scheme and illegal course of conduct, at no time during the Class Period did any off the defendants purchase
any USANA stock on the open market.
9. On March 15, 2007 an article in the Wall Street Journal revealed that the Fraud
Discovery Institute had issued a shocking report that raised many serious concerns about
USANA. The report (which was forwarded to government regulators) exposed, among other
things, that: (i) the Company's business model was untenable because the vast majority of the
Company's reported sales were made to distributors who were not end users of the products; (ii) the Company's long-term growth prospects were unsustainable because growth was almost entirely dependent upon recruitment, rather than upon an increase in retail demand for the
Company's products; (iii) at least 85% of the Company's distributors, who accounted for 86% of the Company's revenues, were losing money; (iv) at least 74% of distributors were failing within the first year; (v) only the top 3% of distributors were receiving 70% of Company-paid
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commissions; (vi) the Company materially misrepresented the "average income" for distributors;
(vii) the Company's products were hopelessly overpriced; and (viii) the Company's ability to attract new distributors would be materially adversely affected if prospective distributors were aware of the Company's failure and. collapse rates, the inability to resell hopelessly overpriced products and that most of the commissions are received by the top 3% of the USANA distributors.
10. In reaction to this shocking news, shares of the Company's common stock plummeted $8.92 per share, or over 15%, to close on March 15, 2007 at $49.85 per share, on unusually heavy trading volume.
11. On March 19, 2007 the Company announced that the SEC was commencing an informal investigation into the Company. On June 13, 2007, the New York Post reported that the
SEC investigation included inquiries into Myron Wentz's sale of 85,000 shares on February 12,
2007 for millions of dollars in proceeds. Significantly, the date of that stock sale represented
USANA's near five-year high in share price. It was just one month later that the fraud was revealed and the stock price plummeted. Also in June 2007, USANA Associates commenced a class action lawsuit against the Company and certain of its senior officers, alleging, among other things, that the Company operated as an unlawful pyramid scheme and that defendants made a number of material misstatement and omissions to conceal that reality. On August 8, 2007,
Forbes. com reported that the Federal Bureau of Investigation ("FBI") had launched a criminal investigation into USANA's-activities.
12. USANA's stock price has never recovered from the March 15, 2007 revelation, closing at $41.68 on November 30, 2007.
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JURISDICTION AND VENUE
13. The claims asserted herein arise under Sections 10(b) and 20(a) of the Exchange
Act, (15 U.S.C. §§ 78j(b) and 78t(a)), and Rule lOb-5 promulgated thereunder (17 C.F.R. §
240. l Ob-5).
14. This Court has jurisdiction over the subject matter of this action pursuant to
Section 27 of the Exchange Act (15 U.S.C. § 78aa) and 28 U.S.C. § 1331.
15. Venue is proper in this District pursuant to Section 27 of the Exchange Act, 15
U.S.C. § 78aa, and 28 U.S.C. § 1391(b), as many of the acts alleged herein, including the preparation and dissemination of materially false and misleading information, occurred in this
District. USANA maintains its corporate headquarters in this District.
16. In connection with the acts, conduct and other wrongs alleged in this complaint, defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, including but not limited to, the United States mails, interstate telephone communications and the facilities of a national securities exchange.
THE PARTIES
17. Lead Plaintiff purchased shares of USANA common stock at artificially inflated prices during the Class Period and has been damaged thereby. A copy of the certification of
Lead Plaintiff is attached hereto as Exhibit A and is incorporated by reference herein.
18. Defendant USANA is a Utah corporation with its principal place of business located at 3838 West Parkway Blvd., Salt Lake City, Utah. At all relevant times, USANA common stock was actively traded in the NASDAQ under the symbol "USNA."
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19. Defendant Myron W. Wentz, the Company's founder, was, at all relevant times, the Company's Chairman and Chief Executive Officer. He signed the Certification that accompanied the materially false and misleading Form 10-Q filed with the SEC on August 8,
2006, the Certification that accompanied the materially false and misleading Form 10-Q filed with the SEC on November 7, 2006, and the materially false and misleading Form 10-K filed with the SEC on March 8, 2007, along with the accompanying Certification. During the Class
Period, defendant Myron Wentz reported selling 85,000 shares of his personally held USANA stock acquired through the exercise of options, for total illicit proceeds of at least $5,183,300.
He made no open-market purchases during the Class Period.
20. Defendant David Wentz, the son of defendant Myron. Wentz, was, at all relevant times, the Company's President and a director, and according to the Company's website,
"manages USANA's day-to-day operations." He signed the materially false and misleading
Form 10-K filed with the SEC on March 8, 2007. During the Class Period, defendant David
Wentz reported selling 20,000 shares of his personally held USANA stock acquired through the exercise of options, for total illicit proceeds of at least $883,450. He made no open-market purchases during the Class Period.
21. Defendant Gilbert A. Fuller ("Fuller") was, at all relevant times, the Company's
Chief Financial Officer, Chief Accounting Officer, and Executive Vice President. Defendant
Fuller signed the materially false and misleading Form 10-Q filed with the SEC on August 8,
2006, along with the accompanying Certification, the materially false and misleading Form 10-Q filed with the SEC on November 7, 2006, along with the accompanying Certification, and the materially false and misleading Form 10-K filed with the SEC on March 8, 2007, along with the
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accompanying Certification. During the Class Period, he reported selling 33,700 shares of his personally held USANA stock acquired through the exercise of options, for total illicit proceeds of at least $1,541,815. Defendant Fuller made no open-market purchases during the Class
Period.
22. Defendants Myron Wentz, David Wentz, and Gilbert Fuller as identified above are collectively referred to hereinafter as the "Individual Defendants." The Individual
Defendants, because of their positions with the Company, possessed the parallel power and authority to control the contents of USANA's reports to the SEC, press releases and presentations to securities analysts, money and portfolio managers, and institutional investors, i.e., the market. Each defendant was provided with copies of the Company's reports and press releases alleged herein to be misleading prior to or shortly after their issuance and had the ability and opportunity to prevent their issuance or cause them to be corrected. Because of their positions and access to material non-public information available to them, each of these defendants knew that the adverse facts specified herein had not been disclosed to and were being concealed from the public, and that the positive representations which were being made were then materially false and misleading. The Individual Defendants are liable for the false statements pleaded herein, as those statements each constituted "group-published" information, the result of the collective actions of the Individual Defendants.
INVESTIGATIVE SOURCES
23. In addition to the investigative sources set forth above, sources who provided information for Lead Counsel's investigation include the following individuals who have knowledge and information with respect to matters alleged herein:
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(a) Confidential Witness No. 1 ("CW-1") is an individual who worked as a
Document Control Representative in USANA's accounting department from November
2006 through February 2007. CW-1's responsibilities included, among other things,
processing and filing all of checks written by USANA.
(b) Confidential Witness No. 2 ("CW-2") is an individual who worked as a
Distributor and Customer Service Representative at USANA from April 2006 through
May 2007. CW-2's responsibilities included, among other things, assisting Associates
with product orders, product returns, commissions and credits, and other customer service
issues.
(c) Confidential Witness No. 3 ("CW-3") is an individual who worked as an
Order Express Agent in USANA's call center in Tooele, Utah from December 2006
through November 2007. CW-3's responsibilities included, among other things,
providing customer service on inbound telephone calls, taking telephonic orders of
products, signing up new customers and tracking delivery of packages.
(d) Confidential Witness No. 4 ("CW-4") is an individual who worked as a
Data Warehouse Specialist in USANA's Salt Lake City facilities from 1999 through
February 2005. CW-4's responsibilities included, among other things, retrieving and
providing data that was exported into Excel, Crystal Reports and other software
applications to generate weekly and monthly internal reports at USANA. One of the
reports prepared by CW-4 on at least a monthly basis included the details regarding the
Company's Associate attrition rate; each time that report was prepared, copies were
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emailed to senior management at the Company, including defendants Fuller and David
Wentz.
(e) Confidential Witness No. 5 ("CW-5") is an individual who worked as the
Company's Manager of Financial Analysis from 2000 through 2003 and thereafter
worked in contract manufacturing for a USANA subsidiary from 2004 through 2005.
The person to whom CW-5 reported as the Manager of Financial Analysis, in turn,
reported directly to defendant Fuller. CW-5's responsibilities as the Manager of
Financial Analysis included, among other things: managing credit and collections;
performing financial analysis; reviewing chargebacks; reviewing promotions and pricing
structures; preparing financial reports for the Company's senior management; and
attending weekly meetings with Fuller and other senior officers to discuss financial
matters. CW-5 recalls that Associate attrition reports were always discussed at these
weekly meetings. Although CW-5's five-year tenure with the Company predates the
Class Period, CW-5's recollection that attrition rates were discussed every week at
meetings with USANA's senior management clearly establishes a pattern that
undoubtedly continued throughout the Class Period. Moreover, CW-5's recollection that
attrition reports were regularly forwarded to the Company's most senior management is
corroborated by the recollections of CW-4, who was with the Company for six years.
(f) Confidential Witness No. 6 ("CW-6") is an individual who worked as a
USANA Associate in California from September 2006 through May 2007. As a USANA
Associate, CW-6 attended training sessions that were highly "recruitment focused", made
required purchases of training materials, made monthly purchases of USANA products
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not for personal use but rather because such purchases were required, and made
substantial efforts to recruit down-line Associates into the distribution chain.
(g) Confidential Witness No. 7 ("CW-7") is an individual who worked as a
USANA Associate in California from August 2005 through February 2007. Like CW-6,
as a USANA Associate, CW-7 attended training sessions that were highly "recruitment
focused", made required purchases of training materials, made monthly purchases of
USANA products not for personal use but rather because such purchases were required,
and made substantial efforts to recruit down-line Associates into the distribution chain.
(h) Confidential Witness No. 8 ("CW-8") is an individual who worked as a
USANA Associate in California from November 2005 through May 2006. Like CW-6
and CW-7, as a USANA Associate, CW-8 attended training sessions that were highly
"recruitment focused", made required purchases of training materials, made monthly
purchases of USANA products not for personal use but rather because such purchases
were required, and made substantial efforts to recruit down-line Associates into the
distribution chain.
BACKGROUND ALLEGATIONS
Distinguishing Legitimate Multi-level Marketing Businesses from Unlawful Pvramid Schemes
24. Multi-level marking is a system of retailing, whereby a company sells its products to end users through tiered layers of distributors and each distributor is entitled to receive a portion of the commission on sales made to end users by other distributors whom they recruit and train. A legitimate multi-level marketing program is product focused and, therefore,
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survives by generating revenue and profits from product sales to end users, rather than by simply recruiting new salespersons. Sales growth, with a legitimate multi-level marketing system, occurs with an increase in demand for the Company's products by end users. As additional distributors are recruited, the number of people marketing and selling the company's products to end users expands.
25. Unlawful pyramid schemes, by contrast, are recruitment focused. Participants are trained and encouraged to focus on recruiting new distributors, rather than on marketing and selling products to retail consumers, thus making it unlikely that meaningful opportunities for retail sales to users outside the program will occur. Pyramid schemes are often characterized by low retail demand for the company's products.
26. Over time, the hierarchy of participants in an unlawful pyramid scheme resembles the form of a pyramid as newer, larger layers of participants join the established structure, Often times, commissions or other rewards are based on the number of distributors recruited. Most of the product sales are made to these distributors, rather than to retail consumers outside of the distribution chain. Even where a marketing/distribution plan formally bases commissions on product sales, the plan still may be deemed an illegal pyramid scheme if, in practice, profits are derived primarily from the recruitment of new participants.
27. With most unlawful pyramid schemes, participants are required to make a payment of money or other valuable consideration to the Company in exchange for the right to sell the company's products, recruit new members into the scheme, and receive commissions or other rewards which are unrelated to the sale of product to the ultimate end user. Such consideration is often in the form of: (i) training or marketing materials that the distributors are
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required to purchase; or (ii) minimum orders of products that distributors are required to make
(commonly referred to as "inventory loading").
28. Pyramid schemes may generate profits for those at the top of the pyramid, but
inevitably result in failure for those at the bottom of the chain, as the market becomes saturated.
As a result, pyramid schemes are characterized by a high rate of failure by, and consequently a high rate of attrition amongst, those at the bottom of the recruitment chains.
29. Pyramid schemes are unlawful because they are inherently fraudulent.
Individuals who buy into such a scheme exchange valuable consideration for an illusory
"opportunity" to make more money. In light of the structure of the scheme and the inherent
saturation of the market that occurs, it is impossible for newer recruits to achieve the levels of
income necessary to survive_ let alone the levels of income nromised at the time thev were recruited. Further, pyramid schemes erode consumer confidence in legitimate multi-level marketing programs, which can, in some instances, offer valuable opportunities to participants
and consumers.
30. Perpetuators of pyramid schemes are subject to substantial liability from a multitude of state and federal agencies. For example, United States Attorneys may initiate action
against scheme perpetuators for racketeering under the Racketeer Influenced and Corrupt
Organizations Act (RICO), 18 U.S.C. § 1961, et seq., or under the Sherman Antitrust Act, 15
U.S.C. § 1, et seq., for conspiring to control the sales and distribution of a product. The Federal
Trade Commission frequently prosecutes the perpetuators of pyramid schemes for violations of the Federal Trade Commission Act, 15 U.S.C. § 45, et seq. The Securities and Exchange
Commission has deemed certain pyramid schemes as "investment contracts" and, therefore, in
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violation of the Securities Act of 1933, 15 U.S.C. § 77a, et seq. and Securities Exchange Act of
1934, 15 U.S.C. § 78a, et seq.
31. Pyramid schemes constitute a criminal violation of Utah's Pyramid Scheme Act,
U.C.A. (1983) § 76-6a-3 and a civil violation of the Utah Consumer Sales Practices Act, U.C.A.
(1973) § 13-11-4. Most other states also maintain criminal and civil statutes prohibiting pyramid schemes as unlawful.
32. Regulators in other countries also police pyramid schemes as unlawful, including regulators in USANA's largest and newest markets. In Canada, USANA's largest market outside of the United States, the Competition Bureau prosecutes violators of the Competition
Act, R.S.C. 1985, ch. 34 (1985), amended by 1992 S.C., ch. 14 (Can.) for "scheme(s) of pyramid selling." In Australia, USANA's second largest foreign market, the Australian Competition and
Consumer Commission polices violations of the Trade Practices Act, 1974, § 65 (Austl.) for engaging in a pyramid selling scheme.
33. USANA continues to expand into Asian markets. In the first quarter of 2007,
USANA expanded into Malaysia. Recognizing the growing and pernicious threat of pyramid schemes, on July 19, 2007 Malaysian Domestic Trade and Consumer Affairs Minister Datuk
Mohd Shafie Apdal announced that Malaysia's Direct Selling Act, 1993 would be amended to include provisions prohibiting pyramid schemes. Other Asian nations in which USANA does business already prohibit pyramid schemes as unlawful. For example, Hong Kong, USANA's second largest Asian market after Australia-New Zealand, prohibits pyramid selling schemes as violations of the Pyramid Selling Prohibition Ordinance, (1997) Cap. 355, § 3. (H.K.).
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34. In recent years, pyramid schemes have come under increased levels of scrutiny by
government regulators within the United States. On April 5, 2006, shortly before the start of the
Class Period, the Federal Trade Commission proposed the Business Opportunity Rule requiring,
inter alia, that multi-level marketing companies make extensive disclosures to new recruits and
mandating a seven-day waiting period before a prospective recruit may join. On April 12, 2006,
the rule was posted in the Federal Register for public comment. Business Opportunity Rule, 71
Fed. Reg. 19,054 (April 12, 2006). Despite the lobbying efforts of USANA and others, on July
1, 2007, the Federal Trade Commission promulgated the rule as Business Opportunity Rule, 16
C.F.R. § 437.1. Under the rule, companies must furnish new recruits with an extensive
"disclosure statement" that includes a plethora of information, including: (i) an outline of recent
legal action involving the company; (ii) the number of direct sellers who cancel within two
years; and (iii) the total funds that the recruit will have to pay to participate in the multi-level marketing program, including inventory purchases. In addition, any earnings claims made by a
multi-level marketing company must be accompanied by detailed substantiation.
SUBSTANTIVE ALLEGATIONS
USANA Possessed Many Characteristics Of An Unlawful Pvramid Scheme
35. Many of the characteristics of USANA's business model, growth strategy,
compensation structure and business practices closely resembled those of an unlawful pyramid
scheme.
36. The structure of USANA's multi-level distribution system encouraged the
constant recruitment of new Associates into the chain. USANA referred to its multi-level
marketing system as the USANA Binary Compensation Plan (the "Plan"). Under the Plan, an
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Associate created a "business center" (which did not require the Associate to open an office or
any other physical entity; the business center simply represented the Associate's position within
the USANA distribution chain), and then recruited two additional Associates to serve as the left
and right sides of that business center. Individuals who were later recruited into the Plan were
placed below these two initial recruits. The left-side and right-side of the Associate's business
center were awarded group sales volume points based upon the product sales of down-line members in the chain. Those points were then translated into commission points, for which the
Associate's business center was compensated. The number of volume points a business center could earn was capped at 5,000 per week; however, an Associate could maintain multiple business centers simultaneously. Once an Associate's business center reached the maximum level of 5,000 points, he or she was given an opportunity to open a new business center and
continue the pattern.
37. USANA was a company that was focused almost entirely on recruiting and growing the pyramid of Associates, rather than on sales of the Company's products to end users.
When new Associates joined the Company, they were trained to recruit, not to sell products.
CW-8 estimates that 85% of the training Associates received was focused on recruiting, and that products and sales were treated as "an afterthought." CW-6 maintains that the Company's emphasis was "so strongly on recruiting" that it was "hard to get information about the products" because "the meetings were always about recruiting."
38. Like many pyramid schemes, under USANA's compensation structure, rewards were provided for recruiting new Associates and were not always tied to sales of products to consumers who were not part of the chain. USANA Associates were rewarded for their
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recruiting efforts with frequent promotional events, such as trips to Hawaii and Europe, cash
prizes, new cars and theater tickets. CW-1 recalls that there was always a threshold number of
new Associates (often 25) that an individual had to recruit in order to qualify as a contest
participant. According to CW-1, these promotional contests were geared much more towards
signing up new Associates than they were towards achieving a threshold level of product sales.
CW-2 also recalls that Associates were entitled to receive trips, cash rewards and other prizes for
successfully recruiting a threshold number of new Associates in a given timeframe.
39. USANA's contract with its Associates facially provided that, in order to qualify
for the receipt of commissions, Associates must sell 70% of their product orders to consumers or
end users and "develop or sell" to at least five retail or Preferred Customers every four weeks.
However, USANA conveniently employed no effective method of monitoring or enforcing these
policies. Moreover, as the term was defined in the contract, Associates themselves qualified as
"end users" -- despite the fact that the vast majority of Associates had no interest in using the
Company's products and were purchasing the Company's products only because they were
required to do so.
40. As with many pyramid schemes, USANA's products were greatly overpriced.
For example, a 28-day supply of premium multivitamins could be purchased at GNC for
approximately $17.00. The price fora monthly supply of USANA's comparable "Essentials" premium multivitamins, by contrast, was $40.00. According to CW-8, Associates could. "rarely" make sales because the products were "not competitively priced" and were "so expensive."
Thus, according to CW-8, recruiting was the only way to make money at USANA. CW-6 also
recalls that the products were "much too expensive" and that there were "better and cheaper"
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products available to consumers. CW-3, who worked in a USANA call center, recalls hearing on
a daily basis from Associates (who were canceling the memberships) that consumers were
simply not interested in purchasing the products because they were so overpriced. CW-1 refers
to the pricing of USANA's products as "a joke."
41. In light of the fact that there was very little real retail demand for the Company's
significantly over-priced products, USANA's Associate failure and attrition rates were extremely high -- indeed most Associates failed within the first few months of joining the Company. The
Fraud Discovery Institute investigation reveals that more than 74% of the Company's Associates were failing within the first year of joining the Company and more than 87% of the Company's
Associates were losing money. Only a very small number of people at the very top of the pyramid were profitable. The Fraud Discovery Institute investigation, which included obtaining
(from a USANA Associate) a chart summarizing the Commissions paid to Associates in North
America in 2006, further revealed that (i) the top 2.6% of Associates in North America received
72.2% of the total commissions paid to Associates in North America; and (ii) approximately
66% of Associates in North America (more than 94,000 USANA Associates) received no commissions whatsoever. CW-3, who worked in a USANA call center, similarly recalls that only "a handful of people" at the Company built downlines and were able to make money, but it was "very, very few people."
42. USANA's senior management was aware of, and constantly monitored, the
Company's Associate attrition rate. CW-4, an individual who worked as a Data Warehouse
Specialist in USANA's Salt Lake City facilities, recalls that monthly reports that included the details regarding the Company's Associate attrition rate were regularly emailed to senior
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management, including defendants Fuller and David Wentz. Similarly, CW-5, USANA's
Manager of Financial Analysis for three years (2000 through 2003), recalls discussing Associate
attrition reports with Fuller and other senior officers at regularly-scheduled, weekly meetings.
43. Throughout the Class Period, the Company's website, "www.usana.com " stated
that the "average income for North American Associates in 2005 was $802.62." That number
was materially inflated, because defendants excluded from the calculation the thousands of
unsuccessful Associates who became inactive before the end of the year. Had defendants
included in their calculation all Associates who were active at any point during the year, the
average income would be a small fraction of that which was reported.
44. The Company used very aggressive, high-pressure recruiting techniques to attract new Associates. For example, CW-8 recalls being recruited at a "house seminar" (a recruiting meeting held at a residential home), by some of the senior-most USANA Associates in the
Company's distribution chain. According to CW-8, the meeting was a high-pressure sales pitch, where the Associates arrived in a Lamborghini, flaunted expensive jewelry and made promises that CW-8 would "make insane amounts of cash." There was little or no discussion of the
Company's products. Like CW-8, the vast majority of Associates joined USANA because they were promised financial freedom, not because they were interested in using the Company's products. The Company's extremely high attrition rate is indicative of the fact that Associates joined the Company to make money, not to use the Company's products. As soon as it became
clear to Associates that being a USANA Associate was a money-losing proposition, they severed their relationship with the Company.
20 Case 2:07-cv-00177-DAK Document 41 Filed 12/03/2007 Page 21 of 30
45. Associates at USANA were required to make large up-front investments for the
right to participate in the Company's scheme. CW-8 recalls paying an initial sign-up fee of
$1,200. CW-6 recalls that the sign up fee was $1,20041,400, but that the "up-line" Associate making the pitch absorbed a portion of the fee in order to induce CW-6 to join the distribution
chain.
46. In order to qualify to receive commissions, USANA Associates were required to make minimum monthly purchases of the Company's products, regardless of whether the
Associates were, in-fact, selling those products to end users outside of the distribution chain.
According to CW-6, the minimum quantity an Associate was required to purchase was contingent upon the number of USANA business centers that Associate maintained. If the
Associate maintained one USANA business center, he or she needed to earn at least 100
"business value points" per month; by ordering a minimum of $100 of USANA products. If the
Associate maintained three USANA business centers, he or she had to earn at least 250 "business value points" per month, by purchasing a minimum of $250 of USANA products. Most
Associates signed up for a program called "autoship," whereby a certain quantity of products were automatically shipped to, and billed to, the Associate each month. CW-8 satisfied the requirement of earning at least 100 "business value points" each month by purchasing $120 in
USANA products monthly, using autoship.
47. USANA's former employees and Associates conclude that the Company operated as an unlawful pyramid scheme. ' CW-1, who worked in USANA's accounting department, resigned from the Company in February 2007 because it was "painfully obvious" that the
Company was an illegal pyramid scheme. CW-1, who processed all of USANA's outgoing
21 Case 2:07-cv-00177-DAK Document 41 Filed 12/03/2007 Page 22 of 30
checks, estimated that 90% of the Company's sales were between distributors, and not to end users. CW-1 regularly reviewed the Company's payroll checks and estimates that the Company was overstating the "average income" per Associate by approximately 35%. CW-1 recalls being emphatically instructed by superiors at the Company to "keep quiet" about the checks processed.
48. In June 2007, a class action lawsuit was commenced on behalf of former and present USANA Associates in the State of California against the Company and several of its senior officers. The complaint alleges, among other things, that: (i) the Company's multi-level marketing model operated as a pyramid scheme; (ii) the Company's business model was unsustainable because it required the constant recruitment of new Associates due to a high level of attrition within the Company's sales force; (iii) the majority of the Company's Associates did not actually sell products to consumers, but rather sold to other Associates; (iv) more than 74% of the Company's Associates were failing within the first year of joining the Company; (v) more than 87% of the Company's Associates were losing money instead of receiving compensation for their sales efforts; (vi) the Company lacked adequate internal and financial controls; (vii) the
Company's statements about its future business prospects and projections were lacking in a reasonable basis at the time they were made; (viii) the Company's representation of a 75% reduction in "middleman" costs because of its direct marketing system was false or misleading, as each tier of distribution received approximately 8% in commissions, resulting in prices which were 50% - 400% above standard retail prices; (ix) the qualifications of members of the
Company's Advisory Board were misrepresented and such members were biased and/or had conflicts of interest which precluded them from providing independent advice; and (x) the
22 Case 2:07-cv-00177-DAK Document 41 Filed 12/03/2007 Page 23 of 30
founder of the Company had renounced his U.S. Citizenship and moved substantial assets to the
Caribbean tax havens of St. Kitts and Nevis, the Isle of Mann, and Liechtenstein.
The Long-Term Sustainability Of USANA's Sales Growth Was Highly Questionable
49. Regardless of whether USANA's business constituted an unlawful pyramid
scheme, the Company's ability to sustain its pattern of growth was highly questionable.
50. As alleged herein, the bulk of USANA sales revenues was derived from sales to
Associates; retail sales to actual end users constituted only a small portion of sales revenues. In
light of the Company's dangerously high Associate attrition rate, sales growth was entirely
dependent upon the ability to continuously recruit massive numbers of new Associates each
month. By the start of the Class Period, that task had become increasingly more difficult for a
number of reasons.
51. First, regulators in the United States and abroad were taking steps to make it more
difficult to operate and grow multi-level marketing businesses, by attracting new recruits. For
example, on April 5, 2006, shortly before the start of the Class Period, the Federal Trade
Commission proposed a law which would require multi-level marketing companies to make
extensive disclosures to new recruits and mandating a seven-day waiting period before a prospective recruit may join. Under the new law, companies would be required to furnish new
recruits with an extensive "disclosure statement" that includes a plethora of information,
including: (i) an outline of recent legal action involving the company; (ii) the number of direct
sellers who cancel within two years; and (iii) the total funds that the recruit will have to pay to
participate in the multi-level marketing program, including inventory purchases. In addition, any
23 Case 2:07-cv-00177-DAK Document 41 Filed 12/03/2007 Page 24 of 30
earnings claims made by a multi-level marketing company would have to be accompanied by
detailed substantiation.
52. USANA and others lobbied heavily against the proposed law. On June 30, 2006,
less than three weeks before the start of the Class Period, defendant David Wentz sent a letter to
the Federal Trade Commission which stated, among other things:
"We believe the Rule as presently drafted could hinder or even ruin USANA's business . . .will make it very difficult, if not impossible, for USANA and our independent distributors to continue growing our respective businesses." [Emphasis added.]
53. In a lengthy submission to the Federal Trade Commission on July 17, 2006, the
Direct Selling Association (the "DSA") also expressed significant concerns regarding the proposed law. The DSA is a national trade association of direct sales companies; throughout the
Class Period, defendant David Wentz was a member of DSA's board of directors. DSA's July
17, 2006 submission regarding the proposed law stated, among other things, that:
DSA cannot overstate the harm to legitimate direct sellers that would result from the proposed rule. The rule presents two potential costs to legitimate direct sellers — the expenses associated with compliance and the impact of decreased business activities. With respect to ' compliance, the FTC has dramatically underestimated the time, effort, and expense necessary to collect information and provide disclosures for the array of issues addressed in the proposed rule. One company alone estimates that it would be faced with the responsibility to print and distribute some 15 million pieces of paper over a three year period as a result of the proposal. The FTC has also failed to acknowledge the significant harm to legitimate direct sellers, i.e., the loss of business that would occur if they were subjected to the requirements of the proposed Rule. Several of the most problematic requirements are addressed below.
24 Case 2:07-cv-00177-DAK Document 41 Filed 12/03/2007 Page 25 of 30
The waiting period requirement in the proposed Rule is impractical and will fundamentally and adversely alter the way in which direct selling operates. The proposed rule requires that individuals wait at least seven days after they first express interest before they can sign up as a direct seller. Much legitimate direct selling recruiting takes place in personal, social meetings, often in a customer's home and often in a group. Interested recruits are ordinarily signed up on the spot. Imposing a waiting period would significantly increase the amount of time direct salespeople, most of whom work part time, would have to devote to recruiting activities, would divorce the transaction from the social interaction to which it relates, and would delay the earning opportunity for the prospective direct salesperson. Moreover, because one of the hallmarks of the direct selling business model is its ease of entry, this change would certainly result in the loss of interest by many recruits. Indeed, a recent survey of the general public indicated that the level of interest in direct selling by a prospective direct seller would drop at least 33 percent if a waiting period were instituted, and among those expressing the greatest likelihood of entering direct selling, the interest level would drop 57 percent. [Emphasis added.]
54. Despite the aggressive lobbying efforts, on July 1, 2007, the Federal Trade
Commission promulgated the rule as Business Opportunity Rule, 16 C.F.R. § 437.1. Although the waiting period requirement was not included as part of the final rule, the rule does require direct sellers to make extensive disclosures to prospective recruits, including, among many others: attrition and retention rates; required entry fees to participate in the multi-level marketing business; required recurring purchases of inventory; the company's business experience; and the history of any criminal or civil liability involving the company.
55. Second, by July of 2006, it was becoming clear that the market for new Associate recruits was reaching saturation. USANA's competitors in the multi-level marketing of nutritional and personal care products were making gains into the market for recruits. For
example, two of USANA's larger competitors, Herbalife Ltd. ("Herbalife") and Nu Skin
25 Case 2:07-cv-00177-DAK Document 41 Filed 12/03/2007 Page 26 of 30
Enterprises, Inc. ("Nu Skin"), were both growing at such rates that they were engulfing the market for prospective recruits. Since Herbalife's initial public offering in June of 2004,
Herbalife had absorbed potential recruits at a very high rate. Herbalife certified its "Supervisors" in February of each year. From 2005 to 2006, the number of "Supervisors" worldwide at
Herbalife grew from 201,925 to 243,572, an increase of 20.6%. Similarly, Nu Skin experienced continuing growth in the number of "distributors" for its nutritional supplements and personal care products. By the end of the second quarter of 2006, Nu Skin had added 8,000 North
American "distributors" since the beginning of that year. CW-2, a distributor and customer service representative with USANA from April 2006 through May 2007, recalls that many of the areas in which USANA operated were saturated with both products and distributors.
56. Finally, the structure of USANA's compensation hierarchy was such that the later an Associate joined the distribution chain, the less likely that individual would be to generate sufficient revenues to survive. As alleged above, the top 3% of USANA's Associates were receiving 70% of all Company-paid commissions. Thus, the "business opportunity" enjoyed by the Associates who joined the Company early on simply did not exist for prospective recruits who were being approached by the start of the Class Period.
Defendants' Materially False And Misleadine Statements Darin g The Class Period
57. Defendants made a number of materially false and misleading statements and omissions throughout the Class Period in order to conceal, among other things: (i) the true nature of the Company's business; (ii) the Company's exceedingly high attrition rate; (iii) that the sales
"growth" reported by defendants was not the result of "enthusiasm" or an increase in demand for the Company's products by end users, but rather was the result of an increase in the number of
26 Case 2:07-cv-00177-DAK Document 41 Filed 12/03/2007 Page 27 of 30
distributors making required purchases of USANA products as a prerequisite to establishing their
own down-line distribution chain (i.e., an expansion in the pyramid); (iv) that the long-term
sustainability of the Company's business model was in doubt; and (v) that the characteristics of
USANA's business model and practices were much like that of unlawful pyramid schemes (i.e., up-front entry fees, little or no emphasis on retail sales of the products, and high-pressure recruiting tactics).
Defendants Report Second Quarter 2006 Financial Results, Falsely Reassure Investors Regarding USANA's Associate Retention Rate And Tout `Consistent Growth of Active Associates" and `Continued Interest" in Usana Products
58, The Class Period begins on July 18, 2006. On that day, USANA issued a press release entitled "USANA Reports 16th Consecutive Quarter of Record Net Sales; Q2 Net Sales
Raan,kpd Pol Q T M1inn • PPC nf ltO SS MO SQ P v.-Il1A1n (T Fniiit y-Raea^ ( ' mm^r^neatinn Pvnancal 99 ^...... W .. —, — v — W_ \4..,...... •b ,..q... ) ,,..^...... j,..,^...... ,...y...^. ^, stating, in relevant part:
Earnings from operations in the second quarter of 2006 grew 4.1 % to $15.4 million, or 16.4% of net sales, compared with $14.7 million, or 18.0% of net sales, in the second quarter of the prior year. Earnings from operations in the second quarter of 2006 were reduced by $1.2 million due to the required expensing of equity- based compensation. The company achieved net earnings in the second quarter of 2006 of $10.3 million, an increase of 8.4%, compared with net earnings of $9.5 million in the second quarter of the prior year. Excluding the expense of equity-based compensation, this increase in net earnings would have been 17.0%. Earnings per share in the second quarter of 2006 improved to $0.55 per share, an increase of 14.6%, compared with $0.48 per share in the second quarter of the prior year. Excluding the expense of equity-based compensation, this increase in earnings per share would have been 22.9%.
27 Case 2:07-cv-00177-DAK Document 41 Filed 12/03/2007 Page 28 of 30
"We are pleased with our strong sales results which continue to be driven by our consistent growth of Active Associates," said Dave Wentz, president of USANA. "In North America, second quarter sales grew by 19%, compared with last year. We believe this growth in our most mature region reflects the continued interest in our products and the business opportunity that USANA offers its Associates. The engagement and effort of our Associate leaders in North America has been one of the driving forces behind this success. Additionally, interest in our low-glycemic, macro optimizer products remained strong and was a growth driver in the second quarter, as this product group reached 14.1% of product sales." [Emphasis added.]
59. In response to these positive statements, the price of USANA common stock
climbed over 11%, from $35.91 on July 18, 2006 to $39.97 on July 19, 2006.
60. On July 19, 2006, defendants held a conference call with securities analysts to review the Company's second quarter 2006 financial results. During the call, defendants reiterated the reported financial results and responded to questions, including a specific question regarding the Company's Associate retention rate. Defendant David Wentz falsely reassured investors as follows:
Mimi Sokolowski: Thank you. Dave, first question is for you. I don't think you've ever just quantified any sort of a retention rate but with the new changes, the new answers to the compensation have you seen that retention rate change at all?
David Wentz: Retention rates for the 14 years have been here just pretty much same -- human nature people are what they are.
Mimi Sokolowski: Okay.
David Wentz: A certain percent will build this business and a certain percent will refuse to talk to a single soul about it. So, we don't see — I mean. we see a little fluctuations, but it is always down, cause that's be about the same thing. Growth tends to help a little bit as more people are having success, but it all evens out in the end.
28 Case 2:07-cv-00177-DAK Document 41 Filed 12/03/2007 Page 29 of 30
61. Also during the July 19, 2006 conference call, defendant David Wentz responded to a specific question regarding a proposed FTC rule that would require, among other things, a 7- day cooling off period following initial contact with a prospective distributor:
Yes, there's definitely been a proposal put out there SEC [sic] proposal on how this opportunity is to be viewed and we are lobbing heavily with the entire direct selling association to make sure that we get to a situation that we're comfortable with. We're pretty confident that there won't be anything that disrupts business very much, probably not even at all. And even if does, we feel that with our integrity, with the things we've done in the past, we will — even if we have to do things, we will still stand head-shoulders above the others. So, we are not concerned about it. [Emphasis added.]
62. On August 8, 2006, USANA filed its Quarterly Report with the SEC on Form 10-
Q for the period ended July 1, 2006, reiterating the financial results detailed in the July 18, 2006 press release and representing that they fairly presented the Company's financial position. The
Form 10-Q also stated, in relevant part:
USANA Health Sciences, Inc. develops and manufactures high- quality nutritional, weight management, and personal care products. We market our products on the basis of high levels of bioavailability, safety, and quality. We distribute our products through a network marketing system using independent distributors whom we refer to as "Associates." As of July 1, 2006, we had 142,000 active Associates worldwide. We also sell products directly to "Preferred Customers" who purchase products for personal use and are not permitted to resell or distribute the products. As of July 1, 2006, we had 75,000 active Preferred Customers worldwide. The majority of sales in the Direct Selling segment come from Associates. For the six months ended July 1, 2006, sales to Associates accounted for approximately 86% of net sales for the Direct Selling segment. For purposes of this report, we only count as active customers those Associates and Preferred Customers who have purchased product from USANA at any time during the most recent three-month period.
29 Case 2:07-cv-00177-DAK Document 41 Filed 12/03/2007 Page 30 of 30
The increase in net sales from the Direct Selling segment in North America was 19.0% compared with the second quarter of 2005. On a constant currency basis, sales in this region improved 15.8% over the same period of the prior year. The growth in this region was largely driven by strong sales in the United States, the Company's largest and most mature market, and Canada. Mexico also contributed to the increase in this region by growing 11.8% over the same period of the prior year. The overall sales increase in this region during the second quarter was driven by a 16.9% increase in the number of active Associates.
63. In the "risk factors" section, the Form 10-Q for the period ended July 1, 2006 stated, in relevant part:
We attempt to identify, manage and mitigate the risks and uncertainties associated with our business to the extent practical. However, some level of risk and uncertainty will always be present. Item lA of our Annual Report on Form 10-K for the fiscal year ended December 31, 2005 describes some of the risks and uncertainties associated with our business. These risks and uncertainties have the potential to materially affect our business, financial condition, results of operations, cash flows, projected results and future prospects. We have revised the following risk factor which was previously disclosed in Item IA of our Annual Report on Form 10-K for the fiscal year ended December 31, 2005:
Network marketing is subject to intense government scrutiny and regulation, which adds to the expense of doing business and the possibility that changes in the law might adversely affect our ability to sell some of our products in certain markets. Network marketing systems such as ours are frequently subject to laws and regulations, including laws and regulations directed at ensuring that product sales are made to consumers of the products and that compensation, recognition, and advancement within the marketing organization are based on the sale of products rather than investment in the sponsoring company. We are subject to the risk that, in one or more of our present or future markets, our marketing system could be found not to comply with these laws and regulations or may be prohibited. Failure to comply with these laws and regulations or such a prohibition could have a material adverse effect on our business, financial condition, and results of operations. Further we may simply be prohibited from distributing products through a network-
30 Case 2:07-cv-00177-DAK Document 41-2 Filed 12/03/2007 Page 1 of 37
marketing channel in some foreign countries, or be forced to alter our Compensation Plan.
We are also subject to the risk that new laws or regulations might be implemented or that current laws or regulations might change, which could require us to change or modify the way we conduct business in certain markets. The United States Federal Trade Commission released a proposed New Business Opportunity Rule on April 5, 2006. The proposed rule would require pre-sale disclosures for all business opportunities, which might include network marketing compensation plans. The New Business Opportunity Rule is currently only a proposed rule. If implemented at all, the rule ultimately may not be implemented in a form that applies to network marketing compensation plans, or may change significantly before it is implemented. If the proposed rule were adopted as currently proposed, it might require USANA to change some of its current practices regarding pre-sale disclosures. [Emphasis added.]
64. The Form 10-Q for the period ended July 1, 2006 also contained a Sarbanes-
Oxley certification, signed by defendants Myron Wentz and Gilbert Fuller, that stated:
I, [Myron W. Wentz/Gilbert A. Fuller], certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of USANA Health Sciences, Inc. (the "Registrant");
2. Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Quarterly Report;
4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a- 15(f) and 15d-15(f)) for the Registrant and have:
31 Case 2:07-cv-00177-DAK Document 41-2 Filed 12/03/2007 Page 2 of 37
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Quarterly Report based on such evaluation; and d) disclosed in this Quarterly Report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and
5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. 65. The statements set forth at ¶¶ 58-64 above were knowingly or recklessly materially false and misleading when made for the reasons stated at IN 35-36 and because they misrepresented and/or omitted those adverse facts which then existed and the disclosure of which
32 Case 2:07-cv-00177-DAK Document 41-2 Filed 12/03/2007 Page 3 of 37
was necessary to make the statements made not materially misleading. Among other things, it was materially false and misleading for defendants to:
(a) represent that the revenues and sales growth reported were the result of a "continued interest in [the Company's] products," when there was very little retail demand for the Company's products and the vast majority of the Company's sales were made to Associates who were not end-users of the products;
(b) represent that the Company's sales growth was the result of "consistent growth of Active Associates" and the "business opportunity that USANA offered its Associates" without disclosing the significant undisclosed risk related the shareholders' investment in the Company in light of the fact that many of the characteristics of USANA's business model, growth strategy, compensation structure and business practices closely resembled that of an unlawful, unsustainable pyramid scheme;
(c) falsely reassure investors that the Company's Associate retention rate was manageable, when USANA's senior management discussed Associate attrition on a weekly basis and more than 74% of the Company's Associates were failing within the first year of joining the Company;
(d) limit the count of "active customers" to those who had purchased products with the preceding three months, without also disclosing that doing so had the impact of materially distorting the Company's reported "average income per Associate" and other reported financial results in light of the Company's high attrition and frequent turnover of Associates; (e) represent that USANA was subject to the generic, regulatory risks associated with operating a network marketing business, when, because USANA functioned much like a pyramid scheme, the Company was subjected to the heightened risk that it would be subjected to significant regulatory scrutiny and civil litigation by defrauded current and former Associates, resulting in additional costs and expenses, distraction of senior management and potential regulatory action with cataclysmic consequences for investors; (fl state, in the Company's generic discussion of risk factors, that "laws and regulations are designed to ensure that product sales are made to end users of the products and that compensation, recognition and advancement within the company are based on the sale of products," without also disclosing to investors that most of USANA's product sales were not made to end users and that USANA often rewarded Associates with vacations, cash and cars for recruiting new people into the scheme, not for selling the Company's products.
33
Case 2:07-cv-00177-DAK Document 41-2 Filed 12/03/2007 Page 4 of 37
(g) represent that the Company was "not concerned about" the proposed FTC rule because it "won't be anything that disrupts business very much, probably not even at all" and simply "might require USANA to change some of its current practices," when: (1) as defendant David Wentz stated in a letter to the FTC just a few weeks earlier, the proposed FTC rule could "hinder or even ruin USANA's business and make it "very difficult if not impossible" for USANA and its Associates to continue growing the business; and (2) as the DSA stated in its submission to the FTC, the proposed rule would "fundamentally and adversely alter" the way in which direct selling businesses operate and result in the "loss of interest" by many recruits;
(h) not disclose that the Company's ability to recruit the tens of thousands of new Associates required to sustain the Company's revenues had become more difficult, in light of. increased regulatory scrutiny; market saturation; and the diminishing attractiveness of the business opportunity offered by USANA to prospective Associates.
66. To the extent that defendants' statements in the Company's Form 10-Q for the
period ended July 1, 2006 are deemed to be forward-looking, they are not protected by the safe
harbor provision of the Private Securities Litigation Reform Act (the "PSLRA"), because:
(a) such statements were material to investors;
(b) defendants had actual knowledge that such statements were false; and
(c) such statements were not accompanied by "meaningful cautionary language."
67. In addition, defendants' oral statements on the July 19, 2006 conference call are
not protected by the safe harbor provision of the PSLRA because:
(a) such statements were material to investors;
(b) such statements were not identified as forward-looking;
(c) such statements were not accompanied by a caution that actual results could differ materially from those projected;
(d) defendants failed to identify a readily available written document containing information about factors which could cause actual results to differ materially from those projected; and
34 Case 2:07-cv-00177-DAK Document 41-2 Filed 12/03/2007 Page 5 of 37
(e) defendants had actual knowledge that such statements were false. Defendants Report Third Quarter 2006 Financial Results, Trumpet An "Increase In The Number Of Active Associates" And Misrepresent The Average Income Per Associate and the Risk of Market Saturation
68. On October 17, 2006, USANA issued a press release entitled "USANA Reports
Strong 15.8% Year-Over-Year Third Quarter Sales Growth," stating, in relevant part:
Earnings from operations in the third quarter of 2006 grew by 7.7% to $15.7 million, or 16.5% of net sales, compared with $14.6 million, or 17.8% of net sales, in the third quarter of the prior year. Earnings from operations in the third quarter of 2006 were reduced by $1.3 million due to the required expensing of equity-based compensation. Net earnings in the third quarter of 2006 grew by 1.8% to $10.2 million, compared with net earnings of $10.0 million in the third quarter of the prior year. Excluding the expense of equity-based compensation, this increase in net earnings would have been 10.5%. Earnings per share in the third quarter of 2006 increased by 7.8% to $0.55 per share, compared with $0.51 per share in the third quarter of the prior year. Excluding the expense of equity-based compensation, earnings per share would have been $0.60, an increase of 17.6%.
"During the third quarter, we again achieved growth in sales, earnings, and Associates," said Dave Wentz, President of USANA. "We were pleased with the double-digit sales growth that we achieved in all of our markets, excluding Japan. We have maintained our commitment to supporting our Associates with excellent customer service, innovative business management tools, and science-based products, and we believe that this strategy will promote our growth in the future." [Emphasis added.]
Commenting on USANA's future expectations, Gilbert A. Fuller, the Company's Executive Vice President and Chief Financial Officer, said, "We expect net sales in the fourth quarter of 2006 to be in the range of $98 million to $100 million, compared with $86.9 million in the fourth quarter of last year, a growth rate of 13% to 15%. During the fourth quarter of 2006, we will be heavily promoting our featured coverage in Success from Home magazine
35 Case 2:07-cv-00177-DAK Document 41-2 Filed 12/03/2007 Page 6 of 37
with related contests and incentives. These promotions and incentives were introduced at our convention in mid-September and so far the feedback from our Associates has been very positive. [Emphasis added..]
69. The October 17, 2006 press release also included aggressive guidance with respect to the Company's growth prospects for 2007:
Looking ahead to 2007, we expect to grow both net sales and earnings per share between 15% and 17%. This earnings per share estimate includes operations in Malaysia, the expense of equity-based compensation, and assumes a tax rate for 2007 of 37%, which is meaningfully higher than the 35% tax rate that we have incurred during most of 2006, [Emphasis added.]
70. On October 18, 2006, defendants held a conference call with securities analysts to review the Company's third quarter 2006 financial results. During the call, defendants reiterated the reported financial results and responded to questions, including a question that was specifically posed to inquire about the possibility of market saturation and a decrease in the
Company's reported "average sales per U.S. Associate." Defendant Fuller falsely reassured investors as follows:
Taylor Burke: Hi, good morning. I wanted to go back to the US market for a second. When I look at the average sales per US associates, it was down 5% year-over-year, and with that being 40% plus to your sales, I'm just wondering if you can comment on the dynamics that's causing that?
Gilbert Fuller: Yes, let's see, we were down from a year ago by about 2%, is that the number you're looking at. My view, maybe others in the room have different view in that, but we had such a strong quarter, second quarter in the US, there were sales up 20%, that I think it.'s going down a bit, it was just kind of a normal convention quarter where we had bit softer overall growth in the US, kind of a normal wiggle as the way I would look at it, I don't see anything in there that I have — that gave me any angst.
36 Case 2:07-cv-00177-DAK Document 41-2 Filed 12/03/2007 Page 7 of 37
Taylor Burke: Okay. I was looking at the sales per Average Associates, year-over-year I calculate it down 5%, that was the second quarter in a row of negative growth, and that's why I was wondering, it looked like more than just one quarter phenomenon, but maybe a trend I didn't know — feel like the US's exaggeration [sic] or -- ?
Gilbert Fuller: Well, we certainly don't feel like the US is saturated. Certainly, I'm showing year-over-year decline of 2%, 1.9% actually, we may have some math differences, and if you would like we can have a discussion of that, about whether or not we've got math issues here. We are going to look and see if we have got something else that we can give you on that. But what my point on the — we have had very strong growth in the US, and often when you have alot of growth, and therefore a lot of new distributors, sometimes that averaged the amount of sales per distributor moves around some, and that could go number of distributors sometimes you get a decline in the math — sales mix is also is a factor in it as well.
Taylor Burke: Okay but It's nothing that you guys are overly concerned about?
Gilbert Fuller: That is correct. [Emphasis added.]
71. Despite a reported $15.7 million in earnings for the quarter (an increase of 7.7%), the Company's reported earning per share of $.055 was slightly below analysts' expectations.
Defendants' false assurances regarding, among other things, market saturation and a drop in the
Company's average sales per Associate, however, were able to cushion the impact of the earnings miss. In response to the Company's failure to meet earnings estimates, the price of
USANA common stock declined only 7.6%, to close at $45.09 on October 18, 2006.
72. On November 7, 2006, USANA filed its Quarterly Report with the SEC on Form
10-Q for the period ended September 30, 2006, which reiterated the financial results reported in the October 17, 2006 press release. The Form 10-Q for the period ended September 30, 2006 also included (i) a generic discussion of "risk factors" that was substantially identical to that
37
Case 2:07-cv-00177-DAK Document 41-2 Filed 12/03/2007 Page 8 of 37
which was contained in the Form 10-Q for the period ended July 1, 2006, as set forth in ¶ 63
above; and (ii) a Sarbanes-Oxley certification, signed by defendants Myron Wentz and Gilbert
Fuller, that was substantially identical to the certification that accompanied the Form 10-Q for
the period ended July 1, 2006, as set forth in ¶ 64 above.
73. The statements set forth at IN 68-72 above were knowingly or recklessly
materially false and misleading when made for the reasons stated at ¶¶ 35-36, and 65 above and
because they misrepresented and/or omitted those adverse facts which then existed and the
disclosure of which was necessary to make the statements made not materially misleading. It
was also materially false and misleading for defendants to:
(a) falsely reassure investors regarding market saturation when the market for prospective Associates was becoming increasingly more saturated; and
(b) falsely reassure investors regarding the "average sales per U.S. Associate," when the Company's reported average sales per Associate was materially overstated, as a result of the Company's exceedingly high attrition rate and the Company's failure to include all Associates in its calculations;
74. In addition, defendants' statements in the October 17, 2006 press release and
October 18, 2006 conference call with analysts regarding expected growth in sale and earnings
for 2007 ("we expect to grow both net sales and earnings per share between 15% and 17%"),
were materially false and misleading when made, and were made without a reasonable basis,
because defendants knew or recklessly disregarded that the Company's ability to recruit the tens
of thousands of new Associates required to sustain such growth would be nearly impossible, in
light of: increased regulatory scrutiny; market saturation; and the diminishing attractiveness of
the business opportunity offered by USANA to prospective Associates.
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75. To the extent that defendants' statements in the Company's October 17, 2006
press release and Form 10-Q for the period ended September 30, 2006 are deemed to be forward-
looking, they are not protected by the safe harbor provision of the PSLRA, because:
(a) such statements were material to investors;
(b) defendants had actual knowledge that such statements were false; and
(c) such statements were not accompanied by "meaningful cautionary language."
76. In addition, defendants' oral statements on the October 18, 2006 conference call
are not protected by the safe harbor provision of the PSLRA because:
(a) such statements were material to investors;
(b) such statements were not identified as forward-looking;
(c) such statements were not accompanied by a caution that actual results could differ materially from those projected;
(d) defendants failed to identify a readily available written document containing information about factors which could cause actual results to differ materially from those projected; and
(e) defendants had actual knowledge that such statements were false.
Defendants Report "Strong" Fourth Quarter 2006 Financial Results and Attribute Such Results To "The Market's Continued Enthusiasm For [Usana'sl Science-Based Products"
77. On January 10, 2007, USANA issued a press release entitled "USANA Provides
Preliminary Fourth Quarter 2006 Results Record Fourth Quarter Net Sales and EPS to Exceed
Guidance," stating, in relevant part:
The company currently expects net sales for this period to be approximately $101 million, before the reclassification as described below. This exceeds management's prior guidance of $98 million to $100 million. Net sales after the reclassification are
39 Case 2:07-cv-00177-DAK Document 41-2 Filed 12/03/2007 Page 10 of 37
expected to be approximately $99.5 million, which represents the 18th consecutive quarter of record net sales. Earnings per share for the fourth quarter are expected to exceed management's previously announced guidance of $0.56 to $0.58. The company now anticipates that earnings per share will be in the range of $0.58 to $0.60 and are not affected by the reclassification as described below.
"We are pleased that we have finished out 2006 with such strong results, which reflect the hard work and dedication of our Associates as well as the market's continued enthusiasm for our science-based products," said Dave Wentz, president of USANA. [Emphasis added.]
78. In response to these positive statements, the price of USANA common stock climbed 5.4%, from $49.60 on January 9, 2007 to close at $52.30 on January 10, 2007.
79. On February 6, 2007, USANA issued a press release entitled "USANA
Announces Record Fourth Quarter 2006 Financial Results," stating in relevant part:
Earnings from operations in the fourth quarter of 2006 grew by 8.3% to $16.7 million, or 16.8% of net sales, compared with $15.4 million, or 18.0% of net sales, in the fourth quarter of the prior year. Earnings from operations in the fourth quarter of 2006 were reduced by $1.3 million, due to the required expensing of equity- based compensation. Earnings per share 'in the fourth quarter of 2006 increased by 13.0% to $0.61 per share, compared with $0.54 per share in the fourth quarter of the prior year. Excluding the expense of equity-based compensation, earnings per share in the fourth quarter of 2006 would have been $0.65, an increase of 20.4%, compared with the fourth quarter of the prior year. Earnings per share in the fourth quarter of 2006 were impacted by an expected unfavorable tax ruling, resulting in a tax rate that was higher than anticipated, and by a favorable foreign exchange gain on capital that was returned to the Company from one of its foreign subsidiaries.
"The fourth quarter marked the 18th consecutive quarter of record sales, driven by strong sales growth of 16.6% in North America
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and 19.9% in the Asia Pacific region," said Dave Wentz, President of USANA. "Our results demonstrate our ability to grow in both our mature markets and in our newer markets.
"The promotions that we offered during the fourth quarter, including those relating to Success from Home Magazine, were key elements of our strong performance in the quarter. We are optimistic that, as we continue to offer contests and promotions, we will consistently generate new Associate prospects throughout 2007." [Emphasis added.]
80. The February 6, 2007 press release also included aggressive guidance with respect to the Company's growth prospects for 2007:
As to our guidance for the full-year 2007, we continue to expect net sales to grow by 15% to 17% over 2006. Based on our current expectations, however, we are raising our full-year 2007 earnings per share guidance and now believe that earnings per share will grow by 17% to 20% over 2006. This earnings per share estimate includes an estimated tax rate of 36.5%, which is higher than our 35.3% tax rate for 2006.
81. In response to these positive statements, the price of USANA common stock climbed 9.7%, from $54.63 on February 6, 2007 to close at $59.92 on February 7, 2007.
82. Just six days later, on February 12, 2007, defendant Myron Wentz sold 85,000 shares of USANA stock at $60.98 per share, for total proceeds of $5,183,300.
83. The statements set forth at IT 77-80 above were knowingly or recklessly materially false and misleading when made for the reasons stated at ¶¶ 35-56, and 65 above and because they misrepresented and/or omitted those adverse facts which then existed and the disclosure of which was necessary to make the statements made not materially misleading. It was also materially false and misleading for defendants to represent that the Company's reported results for 2006 "reflect the hard work and dedication of [USANA's] Associates as well as the
41 Case 2:07-cv-00177-DAK Document 41-2 Filed 12/03/2007 Page 12 of 37
market's continued enthusiasm for [USANA's] science-based products," when: (i) there was very little retail demand for the Company's products and the vast majority of the Company's sales were made to Associates who were not end-users of the products; and (ii) the Company was experiencing extremely high turnover and attrition amongst its Associates and the vast majority of the Company's Associates fail and leave the Company within the first few months.
84. In addition, defendants' statements in the February 6, 2007 press release regarding expected growth in revenues and earnings for 2007 ("we continue to expect net sales to grow by 15% to 17% over 2006") were materially false and misleading when made, and were made without a reasonable basis, because defendants knew or recklessly disregarded that the
Company's ability to recruit the tens of thousands of new Associates required to sustain the
Company's revenues had become more difficult, in light of increased regulatory scrutiny; market saturation; and the diminishing attractiveness of the business opportunity offered by
USANA to prospective Associates.
85. To the extent that defendants' statements in the Company's February 6, 2007 press release are deemed to be forward-looking, they are not protected by the safe harbor provision of the PSLRA for the reasons stated at ¶ 66 above.
Usana's Annual Report on Form 10-K Misrepresents The Company's Business Model and Materially Understates the Risk That The Company Was Functioning As An Unlawful Pvramid Scheme
86. On March 8, 2007, USANA filed its Annual Report with the SEC on Form 10-K for the period ended December 30, 2006 (the "2006 Form 10-K!'). The Form 10-K stated, in relevant part:
42 Case 2:07-cv-00177-DAK Document 41-2 Filed 12/03/2007 Page 13 of 37
Network Marketing Regulation. Laws and regulations in each country in which we operate prevent the use of deceptive or fraudulent practices that have sometimes been inappropriately associated with legitimate direct selling and network marketing activities. These laws include anti-pyramiding, securities, lottery, referral selling, anti-fraud and business opportunity statutes, regulations, and court cases. Illegal schemes, typically referred to as "pyramid," "chain distribution," or "endless chain" schemes, compensate participants primarily or solely for the introduction or enrollment of additional participants into the scheme. Often these schemes are characterized by large up front entry or sign-up fees, over priced products of low value, little or no emphasis on the sale or use of products, high-pressure recruiting tactics, and claims of huge and quick financial rewards requiring little or no effort. Generally these laws are directed at ensuring that product sales ultimately are made to consumers and that advancement within sales organizations is based on sales of the enterprise's products, rather than investments in the organizations or other non- retail sales related criteria or activity. Where required by law, we obtain regulatory approval of our network marketing system, or, where approval is not required or available, the favorable opinion of local counsel as to regulatory compliance.
In addition to federal regulation in the United States, each state has enacted its own "Little FTC Act" to regulate sales and advertising. Occasionally we receive requests to supply information regarding our network marketing plan to regulatory agencies. Although we have from time to time modified our network marketing system to comply with interpretations of various regulatory authorities, we believe that our network marketing program is in compliance with laws and regulations relating to network marketing activities in our current markets Nevertheless, we remain subject to the risk that, in one or more of our present or future markets, the marketing system or the conduct of certain Associates could be found not to be in compliance with applicable laws and regulations. Failure by an Associate or us to comply with these laws and regulations could have a material adverse effect on our business in a particular market or in general. Any or all of these factors could adversely affect the way we do business and could affect our ability to attract potential Associates or enter new markets. In the United States, the FTC has been active in its enforcement efforts against both pyramid schemes and legitimate network marketing organizations with certain legally problematic components, having instituted several enforcement actions
43 Case 2:07-cv-00177-DAK Document 41-2 Filed 12/03/2007 Page 14 of 37
resulting in signed settlement agreements and payment of large fines. Although to our knowledge, we have not been the target of an FTC investigation, there can be no assurance that the FTC will not investigate us in the future. [Emphasis added.]
87. The 2006 Form 10-K also stated the following concerning the Company's distribution system:
We distribute products through a network marketing system, which is a form of person-to-person direct selling through a network of vertically organized independent distributors who purchase products at wholesale prices from the manufacturer and then make retail sales to consumers [Emphasis added.]
Associates cannot simply recruit others for the purpose of developing a downline and earn income passively, depending solely on the efforts of their downline. Each Associate is required to purchase a certain amount of product each month ("Qualifying Purchases"), which they must either resell to consumers or personally use, in order to qualify to earn commissions or bonuses under USANA's Compensation Plan. Associates do not earn commissions on these Qualifying Purchases. The purpose of our Compensation Plan is to reward Associates for actively selling our products and for recruiting and retaining others to sell our products.
88. The 2006 Form 10-K stated the following concerning the sustainability of the
Company's business model:
If the number or productivity of independent Associates does not increase, our revenue will not increase. To increase revenue, we must increase the number and/or the productivity of our Associates. We can provide no assurances that the number of Associates will increase or remain constant, or that their productivity will increase. We experienced a 29.5%, 16.7%, and 15.0% increase in active Associates during 2004, 2005, and 2006, respectively. The number of active Associates may not increase and could decline in the future. Associates may terminate their services at any time, and, like most direct selling companies, we experience a high turnover among Associates from year to year.
44 Case 2:07-cv-00177-DAK Document 41-2 Filed 12/03/2007 Page 15 of 37
We cannot accurately predict any fluctuation in the number and productivity of Associates because we primarily rely upon existing Associates to sponsor and train new Associates and to motivate new and existing Associates. Operating results could be adversely affected if our existing and new business opportunities and products do not generate sufficient economic incentive or interest to retain existing Associates and to attract new Associates.
Attract and Retain Associates and Preferred Customers. We recognize the need to continue to attract and retain Associates. We maintain emphasis on the partnership between the USANA management team and our Associate leaders. Through this partnership, our Associate leaders continue to host "Health & Freedom" meetings and online presentations, both aimed at presenting the business opportunity to potential Associates and providing additional training and resources for existing Associates. In addition to our Annual International Convention and our Asia Pacific Convention, we hold several regional events in key growth areas to provide support and training to new Associates in these areas. We intend to continue growing our business by maintaining a focus on our two core values, "True Health" and "True Wealth." We plan to accomplish this by increasing the number of active Associates and teaching them how to build a strong customer base. By leveraging the current growth we have in our Associate field, we believe we can continue to attract individuals that are interested in joining a winning team and starting a home-based business with USANA.
89. The 2006 Form 10-K stated the following concerning the Company's method of counting "active Associates":
As of December 30, 2006, we had 153,000 active Associates and 78,000 active Preferred Customers worldwide. For purposes of this report, we only count as active customers those Associates and Preferred Customers who have purchased product from USANA at any time during the most recent three-month period.
90. The 2006 Form 10-K also contained a Sarbanes-Oxley certification, signed by defendants Myron Wentz and Gilbert Fuller, that was substantially identical to the certifications
45 Case 2:07-cv-00177-DAK Document 41-2 Filed 12/03/2007 Page 16 of 37
that accompanied the Form 10-Qs for the periods ended July 1, 2006 and September 30, 2006, as set forth in ¶ 64 above.
91. In connection with the filing of the 2006 Form 10-K, a letter to shareholders signed by Dr. Myron Wentz and David Wentz, .and included in the Company's annual report for
2006, contained the following material misrepresentations regarding the sustainability of the
Company's business model:
Our Associates—a cornerstone of our continued success USANA Associates, our single most valuable asset, are essential to our success. We ended 2006 with 153,000 active Associates, an increase of 15 percent from 133,000 Associates at the end of 2005. The number of Preferred Customers also grew by 11.4 percent. In addition to our world-class product lines, we also provide our Associates with the support they need to make growing their business as easy as possible. We offer superior customer service and straightforward Web-based sales and management programs, ranging from online product ordering to Website hosting. We also regularly create award-winning sales tools that are affordable and easy to use. At the 2006 convention, we unveiled PresentationPro, a new software program designed to help Associates create polished and up-to-date sales presentations. One of the convention's biggest announcements was our feature in the November 2006 issue of Success from Home. This national newsstand magazine dedicated the entire issue to USANA's products and home-based business opportunity, and Associates have had great success using it as a recruiting tool.
The future---our next 15 years
In 2007 we will commemorate our 15th year as a world-class company. And while we have many past accomplishments to celebrate, our future looks even brighter. We will continue to expand into promising markets and' develop new products. However, we know that it is the fundamentals that make USANA great—our focused business strategy, our science-based products, and our world-class Associates. In summary, we want to thank the thousands of USANA Associates and nearly 900 employees worldwide who are tireless in their commitment to USANA and
46 Case 2:07-cv-00177-DAK Document 41-2 Filed 12/03/2007 Page 17 of 37
our long-term vision. With their dedication, we can look forward to our next 15 years of health and prosperity. [Emphasis added.]
92. The statements set forth at IN 86-91 above were knowingly or recklessly materially false and misleading when made for the reasons stated at IN 35-56, and 65 above and because they misrepresented and/or omitted those adverse facts which then existed and the disclosure of which was necessary to make the statements made not materially misleading. It was also materially false and misleading for defendants to:
(a) include the generic risk disclosure that "like most direct selling companies, we experience a high turnover among Associates from year to year" without disclosing (1) the actual attrition rate; or (2) the fact that USANA's attrition rate was extremely and alarmingly high;
(b) represent that USANA was subject to the generic, regulatory risks associated with operating a network marketing business, when, because USANA functioned much like a pyramid scheme, the Company was subjected to the heightened -1, 4L.n4 ;4 --IA U- m.b.ie..4e.a 4..--l-+- n..t.^i ^.` i.n«4ni.«..4:.... -A -.1 1i4i n*- U< defrauded current and former Associates, resulting in additional costs and expenses,r distraction of senior management and potential regulatory action with cataclysmic consequences for investors;
(c) represent the belief that USANA "is in compliance with laws and regulations relating to. network marketing," when many of the characteristics of the Company's business model, growth strategy, compensation structure and business practices closely resembled that of an unlawful pyramid scheme;
(d) state that the Company "cannot accurately predict any fluctuation in the number and productivity of Associates," when the Company's senior management monitored such statistics on a weekly basis;
(e) describe the Company's Associates as distributors who "purchase products at wholesale prices from the manufacturer and then make retail sales to consumers," when the vast majority of the Company's Associates did not make retail sales to end users of the Company's products;
(fl state that Associates "cannot simply recruit others for the purpose of developing a downline and earn income passively, depending solely on the efforts of their downline" when, as former USANA Associates recall, vacations, cars, and other rewards were paid to Associates for recruiting new individuals into the USANA distribution chain; and
47 Case 2:07-cv-00177-DAK Document 41-2 Filed 12/03/2007 Page 18 of 37
(g) trumpet growth in the number of the Company's Associates without also disclosing the exceedingly high attrition and turnover amongst Associates (74% failing within the first year) and the fact that the Company's ability to recruit the tens of thousands of new Associates required to sustain the Company's growth had become more difficult, in light of increased regulatory scrutiny; market saturation; and the diminishing attractiveness of the business opportunity offered by USANA to prospective Associates.
93. To the extent that defendants' statements in the Company's Form 10-K for the period ended December 30, 2006 are deemed to be forward-looking, they are not protected by the safe harbor provision of the PSLRA for the reasons stated at 164 above.
The Truth Begins to Emerge
94. On March 15, 2007, the Fraud Discovery Institute issued a press release announcing the publication of a massive report detailing the results of an investigation into
USANA's alleged improper business practices. The press release stated, in relevant part:
The Fraud Discovery Institute, under the direction of Barry Minkow, has issued a report on public company, Usana Health Sciences, Inc., alerting authorities to possible fraud and also raising questions about the legitimacy of the entire multi-level marketing industry. The Wall Street Journal reported the story today.
Minkow's 500 page report, addressed to the FBI, SEC and IRS and now posted on www.frAuddiscovery.net, raises many serious concerns about Usana, including the company's alleged untenable business model whereby no less than 85% of current distributors are losing money and no less than 74% of distributors fail within the first year. Yet these distributors account for 86% of the company's multi-level marketing revenue:
The report also documents another secret of the Usana business -- specifically that only 3% of distributors receive 70% of company- paid commissions, which, in turn, skews the alleged "average income figure" for distributors posted on the company's web site.
Minkow also attacked the very heart of the Usana business model by allegedly debunking the myth that manufacturer direct-to- distributor sales and purchases saves distributors and preferred Usana customers "75%" because- it avoids the traditional method of retail sales with national, regional and local retail outlets
48 Case 2:07-cv-00177-DAK Document 41-2 Filed 12/03/2007 Page 19 of 37
marking up the cost of the item. However, by hiring two accredited, independent labs, the Fraud Discovery Institute appears to have demonstrated that Usana's best selling vitamin products are hopelessly overpriced and, in one example, were over 400% more expensive than a comparable over the counter health food store-bought product. "If this is the case, one would expect the company to struggle with reselling these products because of their huge markup. The evidence appears to show just that, as only 14% of company revenues stem from retail sales."
According to Minkow: "From 2003 to 2006 the company repurchased 3,881,000 in stock with cash from operations totaling 133,377,000, while insiders sold off over 95 million in exercised options. That, in itself, is not wrong, but since the operating cash of the company to repurchase these shares came from the undisclosed attrition rates of collapsed distributors who had bought into the "True Wealth" dream of Usana, but instead lost money and went into further debt, the Usana management literally funded stock buy backs that enriched themselves from those failed distributors who could least afford to lose money. That is wrong, that is evil," Minkow said.
Moreover, while Wall Street analysts who follow USANA continue to recommend a strong buy for the stock, the Minkow report may demonstrate a material failure by many analysts to understand the `below the iceberg' effects of the Usana numbers. Says Minkow, "While many analysts point to things like EBITA and EPS, they ignore -- because they are purposely kept in the dark by Usana's failure to disclose material facts -- critical factors such as the obvious: the largest portion of Usana's revenue comes from distributors who -are in a constant state of collapse with 85% of these distributors losing money and no less than 74% failing within a 12 month time period, causing significant saturation challenges that will materially impact the company."
"If new distributors knew about failure and collapse rates, the inability to resell hopelessly overpriced products and that most of the money paid in commissions goes to the top 3% of the Usana distributors, Usana's ability to attract new distributors would be materially adversely affected, which appears to be why they have chosen not to disclose any of these facts."
There are also significant management credibility issues with Dr. Myron Wentz, the company Chairman and Founder and majority
49 Case 2:07-cv-00177-DAK Document 41-2 Filed 12/03/2007 Page 20 of 37
stock holder, who renounced his U.S. citizenship and misrepresented the location of the entity that controls 46% of Usana stock -- it is in the tax-haven country of Liechtenstein.
95. On the same day, The Wall Street Journal published an article entitled "Usana
Sales Plan Draws Fire From Felon Turned Gumshoe" which summarized many of the facts and conclusions set forth in the report by the Fraud Discovery Institute.
96. Upon the release of this shocking news, shares of the Company's common stock declined $8.92 per share, or over 15%, to close on March 15, 2007 at $49.85 per share, on unusually heavy trading volume.
97. In the evening of March 15, 2007, USANA tried to control the damage to its stock price by issuing a press release announcing that it had filed a defamation action against the Fraud
Discovery Institute and its co-founder, Barry Minkow, in the United States District Court for the
District of Utah. USANA Health Sciences, Inc. v. Barry Minkow, Case No. 2:07CV 159 (D.
Utah). In response to USANA's lawsuit, on March 18, 2007, the Fraud Discovery Institute published a detailed letter further discussing USANA's wrongful and fraudulent business practices. Among other things, the letter stated that: (i) 87% of USANA Associates lose money;
(ii) the majority of USANA's Associates' sales were made to each other and not to consumers; and (iii) USANA's published average Associate incomes were misleading, as only 3% of
Associates received 70% of all commissions.
98. Although the most recent complaint in that action questions the motives of Barry
Minkow in publishing the report concerning USANA, the complaint does not allege as untrue the alarming statistics reported by the Fraud Discovery Institute.
50 Case 2:07-cv-00177-DAK Document 41-2 Filed 12/03/2007 Page 21 of 37
99. On March 19, 2007, USANA issued a press release entitled "USANA Voluntarily
Discloses Informal SEC Inquiry," stating that the Salt Lake District Office of the SEC had begun an informal investigation into the Company. This information was echoed in a Form 8-K filed with the SEC on March 21, 2007. Later, on June 13, 2007, in an article entitled "SEC Eyeing
Usana Chief," the New York Post reported that the SEC investigation included inquiries into
Myron Wentz's sale of 85,000 shares on February 12, 2007 for millions of dollars in proceeds.
Not coincidentally, February 12, 2007 represented a near five year high in the Company's stock price. Soon thereafter, USANA's fraud was revealed and the stock plummeted. On August 8,
2007, Forbes. com reported that the FBI has launched a criminal investigation into USANA's activities.
100. As alleged above, in June 2007, a class action lawsuit was commenced on behalf of former and present USANA Associates in the State of California against the Company and several of its senior officers. Johnson v. USANA Health Sciences, Inc., Case No. 37-2007-
00053808-CU-BT-NC (Cal. Super. Ct.). The complaint alleges, among other things, that: (i) the
Company's multi-level marketing model operated as a pyramid scheme; (ii) the Company's business model was unsustainable because it required the constant recruitment of new Associates due to a high level of attrition within the Company's sales force; (iii) the majority of the
Company's Associates did not actually sell products to consumers, but rather sold to other
Associates; (iv) more than 74% of the Company's Associates were failing within the first year of joining the Company; (v) more than 87% of the Company's Associates were losing money instead of receiving compensation for their sales efforts; (vi) the Company lacked adequate internal and financial controls; (vii) the Company's statements about its future business prospects
51 Case 2:07-cv-00177-DAK Document 41-2 Filed 12/03/2007 Page 22 of 37
and projections were lacking in a reasonable basis at the time they were made; (viii) the
Company's representation of a 75% reduction in "middleman" costs because of its direct
marketing system was false or misleading, as each tier of distribution received approximately 8%
in commissions, resulting in prices which were 50% - 400% above standard retail prices; (ix) the
qualifications of members of the Company's Advisory Board were misrepresented and such members were biased and/or had conflicts of interest which precluded them from providing
independent advice; and (x) the founder of the Company had renounced his U.S. Citizenship and moved substantial assets to the Caribbean tax havens of St. Kitts and Nevis, the Isle of Mann,
and Liechtenstein.
101, On July 16, 2007, in a Form 8-K filed with the SEC, USANA announced the resignation of Grant Thornton LLP ("GT"), its auditor for nearly 10 years. Although no reason was cited for OT's abrupt and unusual resignation, the Form 8-K extensively discussed a disagreement between OT and USANA concerning the scope of the procedures to be performed by the auditors and the extent to which USANA's Audit Committee should engage new, independent consultants in lieu of recent accusations against the Company. In spite of GT's curious resignation, the 8-K claims that all disagreements between GT and the Company were resolved to GT's satisfaction. In reaction to this news, the price of USANA's stock dropped from $50.10 to $41.38, a decline of 17.4%.
102. Since the end of the Class Period, USANA has repeatedly lowered its sales projections for 2007. For example, on April 4, 2007, the Company reduced its net sales projections for the first quarter of 2007 from $1034105 million, to $102 million. Later, on April
17, 2007, the Company lowered its nets sales projections for the full-year 2007 from $430-$437
52 Case 2:07-cv-00177-DAK Document 41-2 Filed 12/03/2007 Page 23 of 37
million, to approximately $423-$430 million ("a one year growth rate of between 15% and
18%"). On October 16, 2007, USANA again reduced its net sales projections for the full-year
2007 from $423-$430 million, to $422-$424 million.
103. USANA's stock price has never recovered from the March 15, 2007 revelation,
closing at $41.68 on November 30, 2007.
CLASS ACTION ALLEGATIONS 104, Lead Plaintiff brings this action as a class action pursuant to Federal Rule of Civil
Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all those who purchased or
otherwise acquired USANA common stock between July 18, 2006 through and including March
14, 2007, and who were damaged thereby. Excluded from the Class are the Individual
Defendants, members of their immediate families and their legal representatives, heirs,
successors or assigns and any entity in which defendants have or had a controlling interest.
105. The members of the Class are so numerous that joinder of all members is
impracticable. Throughout the Class Period, USANA common stock was actively traded on
NASDAQ under the stock symbol "USNA." While the exact number of Class members is unknown to Lead Plaintiff at this time and can only be ascertained through appropriate discovery, Lead Plaintiff believes that there are hundreds or thousands of members in the proposed Class. Record owners and other members of the Class may be identified from records maintained by USANA or its transfer agent and may be notified of the pendency of this action by mail, using the form of notice similar to that customarily used in securities class actions.
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106. Lead Plaintiff's claims are typical of the claims of the members of the Class as all members of the Class are similarly affected by defendants' wrongful conduct in violation of federal law that is complained of herein.
107. Lead Plaintiff will fairly and adequately protect the interests of the members of the Class and has retained counsel competent and experienced in class and securities litigation.
Lead Plaintiff has no interests that conflict with those of the class.
108. Common questions of law and fact exist as to all members of the Class and predominate over any questions solely affecting individual members of the Class. Among the questions of law and fact common to the Class are:
(a) whether the federal securities laws were violated by defendants' acts as alleged herein;
(b) whether statements made by defendants to the investing public during the Class Period misrepresented material facts about the business, operations and management of USANA;
(c) whether defendants' statements omitted material facts necessary to make the statements made, in light of the circumstances under which they were made, not misleading;
(d) whether defendants knew or recklessly disregarded that their statements were false and misleading;
(e) whether the price of USANA common stock was artificially inflated; and
(f) to what extent the members of the Class have sustained damages and the proper measure of damages.
109. A class action is superior to all other available methods for the fair and efficient adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the damages suffered by individual Class members may be relatively small, the expense and burden of individual litigation make it impassible for members of the Class to individually
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redress the wrongs done to them. There will be no difficulty in the management of this action as a class action.
LOSS CAUSATION
110. During the Class Period, as detailed herein, defendants engaged in a scheme to deceive the market and a course of conduct that artificially inflated or distorted the price of
USANA common stock and operated as a fraud or deceit on the Class. Defendants achieved this by making positive statements about USANA's business and financial results to the investing public while concealing material information, including that USANA's business operated as a pyramid scheme. When the truth was disclosed to the market, the price of USANA common stock fell precipitously. As a result of their transactions in USANA common stock during the
Class Period, Lead Plaintiff and other members of the Class suffered economic loss, i.e., damages under federal securities laws.
111. As a direct result of the public revelations regarding the truth about USANA's business practices, the price of USANA common stock closed at $49.85 on March 15, 2007, a decline of over 15% from the previous day's closing price of $58.77 and a decline of almost 20% from the Class Period high trading price, which had been reached only 22 days earlier. This drop removed artificial inflation and distortion from USANA common stock, thus causing real economic loss to investors who purchased USANA stock during the Class Period.
112. The timing and magnitude of the decline of USANA common stock negate any inference that the losses suffered by Lead Plaintiff and other Class members was caused by changed market conditions, industry factors, or facts unrelated to defendants' fraudulent conduct.
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ADDITIONAL SCIENTER ALLEGATIONS
113. As alleged herein, defendants acted with scienter in that defendants knew that the public documents and statements issued or disseminated in the name of the Company were materially false and misleading; knew that such statements or documents would be issued or disseminated to the investing public; and knowingly and substantially participated or acquiesced in the issuance or dissemination of such statements or documents as primary violations of the federal securities laws. As set forth elsewhere herein in detail, defendants, by virtue of their receipt of information reflecting the true facts regarding USANA their control over, and/or receipt and/or modification of USANA's allegedly materially misleading misstatements and/or their associations with the Company which made them privy to confidential proprietary information concerning USANA, participated in the fraudulent scheme alleged herein.
114. Defendants knew or recklessly disregarded the false and misleading nature of the information which they caused to be disseminated to the investing public. The fraudulent scheme described herein, which concerns the heart of the Company's business model, could not have been perpetrated without the knowledge and complicity of the personnel at the highest level of the Company, including the Individual Defendants.
115. The Individual Defendants had the opportunity to perpetrate the fraudulent scheme and course of business described herein because they were the most senior officers of
USANA and they issued statements and press releases on behalf of the Company.
116. The Individual Defend antswere further motivated to engage in a fraudulent course of conduct as it allowed them to sell 138,700 shares of their personally-held USANA
56
Case 2:07-cv-00177-DAK Document 41-2 Filed 12/03/2007 Page 27 of 37
stock at inflated prices, for gross proceeds in excess of $7,608,565. The shares sold by the
Individual Defendants during the Class Period are set in the following chart:
Name Date Shares Price Proceeds Fuller, Gilbert 10/19/06 33,700 $44.95 $1,541,815
Wentz, David 7/27/06 5,000 $43.83 $219,150 7/28/06 5,000 $43.75 $218,750 8/14/06 5,000 $44.35 $221,750 8/15/06 5,000 $44.76 $223,800 Total: 20,000 $883,450
Wentz, Myron 2/12/07 85,000 $60.98 $5,183,300
117. Defendants' fraudulent scheme also allowed other Company insiders to sell
hundreds of thousands of shares of USANA common stock at artificially inflated or distorted
prices.
APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD ON THE MARKET DOCTRINE
118. At all relevant times, the market for USANA common stock was an efficient
market for the following reasons, among others:
(a) USANA common stock met the requirements for listing, and was listed and actively traded on NASDAQ, a highly efficient and automated market;
(b) As a regulated issuer, USNA filed periodic public reports with the SEC and NASDAQ;
(c) USANA regularly communicated with public investors via established market communication mechanisms, including through regular disseminations of press releases on the national circuits of major newswire services and through other wide-ranging public disclosures, such as communications with the financial press and other similar reporting services; and
(d) USANA was followed by several securities analysts employed by major brokerage firms who wrote reports which were distributed to the sales
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force and certain customers of their respective brokerage firms. Each of these reports was publicly available and entered the public marketplace.
119. Asa result of the foregoing, the market for USANA common stock promptly
digested current information regarding USANA from all publicly-available sources and reflected
such information in the price of USANA common stock. Under these circumstances, all those
who traded in USANA common stock during the Class Period suffered similar injury through
their purchases of USANA common stock at artificially inflated or distorted prices and a
presumption of reliance applies.
NO SAFE HARBOR 120. The statutory safe harbor provided for forward-looking statements under certain
circumstances does not apply to any of the allegedly false statements pleaded in this complaint.
Many of the specific statements pleaded herein were not identified as "forward-looking
statements" when made. To the extent there were any forward-looking statements, there were no
meaningful cautionary statements identifying important factors that could cause actual results to
differ materially from those in the purportedly forward-looking statements. Alternatively, to the
extent that the statutory safe harbor does apply to any forward-looking statements pleaded
herein, Defendants are liable for those false forward-looking statements because at the time each
of those forward-looking statements was made, the particular speaker knew that the particular
forward-looking statement was false, and/or the forward-looking statement was authorized
and/or approved by an executive officer of USANA who knew that those statements were false when made.
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FIRST CLAIM
Violation Of Section 10(b) of The Exchange Act and Rule 10b-5 Promulsated Thereunder Against All Defendants 121. Lead Plaintiff repeats and realleges each and every allegation contained above as if fully set forth herein.
122. During the Class Period, defendants carried out a plan, scheme and course of conduct which was intended to and, throughout the Class Period, did: (i) deceive the investing public, including plaintiff and other Class members, as alleged herein; and (ii) cause Lead
Plaintiff and other members of the Class to purchase USNA common stock at artificially inflated or distorted prices. In furtherance of this unlawful scheme, plan and course of conduct, defendants, and each of them, took the actions set forth herein.
123. Defendants: (a) employed devices, schemes, and artifices to defraud; (b) made untrue statements of material fact and/or omitted to state material facts necessary to make the statements not misleading; and (c) engaged in acts, practices, and a course of business which operated as a fraud and deceit upon;hose who traded in USANA common stock in an effort to maintain artificially inflated or distorted market prices for USANA common stock in violation of
Section 10(b) of the Exchange Act and Rule l Ob-5. All defendants are named either as primary participants in the wrongful and illegal conduct charged herein or as controlling persons as alleged below.
124. Defendants, individually and in concert, directly and indirectly, by the use, means or instrumentalities of interstate commerce and/or of the mails, engaged and participated in a
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continuous course of conduct to conceal adverse material information about the business,
operations and future prospects of USANA as specified herein.
125. Defendants employed devices, schemes and artifices to defraud, while in possession of material adverse non-public information and engaged in acts, practices, and a
course of conduct as alleged herein in an effort to assure investors of USANA's value and performance and continued substantial growth, which included the making of, or the participation in the making of, untrue statements of material facts and omitting to state material facts necessary in order to make the statements made about USANA and its business operations and future prospects in light of the circumstances under which they were made, not misleading, as set forth more particularly herein, and engaged in transactions, practices and a course of business which operated as a fraud and deceit upon those who traded in USANA common stock during the Class Period.
126. Each of the Individual Defendant's primary liability, and controlling person liability, arises from the following facts: (i) the Individual Defendants were high-level executives and/or directors at the Company during the Class Period and members of the Company's management team or had control thereof; (ii) each of these defendants, by virtue of his responsibilities and activities as a senior officer and/or director of the Company was privy to and participated in the creation, development and reporting of the Company's internal budgets, plans, projections and/or reports; (iii) each of these defendants enjoyed significant personal contact and familiarity with the other defendants and was advised of and had access to other members of the
Company's management team, internal reports and other data and information about the
Company's finances, operations, and sales at all relevant times; and (iv) each of these defendants
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was aware of the Company's dissemination of information to the investing public which they knew or recklessly disregarded was materially false and misleading.
127. The Defendants had actual knowledge of the misrepresentations and omissions-of material facts set forth herein, or acted with reckless disregard for the truth in that they failed to ascertain and to disclose such facts, even though such facts were available to them. Such
Defendants' material misrepresentations and/or omissions were done knowingly or recklessly and for the purpose and effect of concealing USANA's operating condition and future business prospects from the investing public and supporting the artificially inflated or distorted price of
USANA common stock. As demonstrated by Defendants' misstatements of the Company's business and operations throughout the Class Period, Defendants, if they did not have actual knowledge of the misrepresentations and omissions alleged, were reckless in failing to obtain such knowledge by deliberately refraining from taking those steps necessary to discover whether those statements were false or misleading.
128. As a result of the dissemination of the materially false and misleading information and failure to disclose material facts, as set forth above, the market price of USANA common stock was artificially inflated or distorted during the Class Period. In ignorance of the fact that market prices of USANA common stock were artificially inflated or distorted, and relying directly or indirectly on the false and misleading statements made by defendants, or upon the integrity of the market in which USANA common stock trades, and/or in the absence of material adverse information that was known to or recklessly disregarded by defendants, but not disclosed in public statements by defendants during the Class Period, Lead Plaintiff and the other members
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of the Class purchased and/or acquired USANA common stock at artificially inflated or distorted prices during the Class Period, and were damaged thereby.
129. At the time of defendants' misrepresentations and omissions, Lead Plaintiff and other members of the Class were ignorant of their falsity, and believed them to be true. Had
Lead Plaintiff and the other members of the Class and the marketplace known the truth regarding
USANA's business practices, which were not disclosed by defendants, Lead Plaintiff and other members of the Class would not have traded in USANA common stock or would not have traded in USANA common stock at the artificially inflated or distorted prices that were paid.
130. By virtue of the foregoing, defendants have violated Section 10(b) of the
Exchange Act and Rule l Ob-5 promulgated thereunder.
131. As a direct and proximate result of defendants' wrongful conduct, Lead Plaintiff and the other members of the Class suffered damages in connection with their respective transactions in USANA common stock during the Class Period.
SECOND CLAIM
Violation of Section 20(a) of The Exchange Act Against the Individual Defendants
132. Lead Plaintiff repeats and realleges each and every allegation contained above as if fully set forth herein.
133. The Individual Defendants acted as controlling persons of USANA within the meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high-level positions, and their ownership and contractual rights, participation in and/or awareness of the
Company's operations and/or intimate knowledge of the false financial statements filed by the
Company with the SEC and disseminated to the investing public, the Individual Defendants had
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the power to influence and control and did influence and control, directly or indirectly, the decision-making of the Company, including the content and dissemination of the various statements which Plaintiffs contend are false and misleading. The Individual Defendants were provided with or had unlimited access to copies of the Company's reports, press releases, public filings and other statements alleged by plaintiffs to be misleading prior to and/or shortly after these statements were issued and had the ability to prevent the issuance of the statements or cause the statements to be corrected.
134. In particular, each of these defendants had direct and supervisory involvement in the day-to-day operations of the Company and, therefore, is presumed to have had the power to control or influence the particular transactions giving rise to the securities violations as alleged herein, and exercised the same.
135. As set forth above, USANA and the Individual Defendants each violated Section
10(b) and Rule l Ob-5 by their acts and omissions as alleged in this Complaint. By virtue of their positions as controlling persons, the Individual Defendants are liable pursuant to Section 20(a) of the Exchange Act. As a direct and proximate result of defendants' wrongful conduct, Lead
Plaintiff and other members of the Class suffered damages in connection with their purchase of
USANA common stock during the Class Period.
WHEREFORE, Lead Plaintiff prays for relief and judgment, as follows:
a. Determining that this action is a proper class action under Rule 23 of the Federal Rules of Civil Procedure;
b. Awarding compensatory damages in favor of Lead Plaintiff and the other Class members against all defendants, jointly and severally, for all damages sustained as a result of defendants' wrongdoing, in an amount to be proven at trial, including interest thereon;
63 Case 2:07-cv-00177-DAK Document 41-2 Filed 12/03/2007 Page 34 of 37
C. Awarding Lead Plaintiff and the Class their reasonable costs and expenses incurred in ,this action, including counsel fees and expert fees; and
d. Such other and further relief as the Court may deem just and proper.
JURY TRIAL DEMAND
Lead Plaintiff hereby demands a trial by jury.
Dated: December 3, 2007 DREIER LLP
By: ►__ Daniel B. cotti (admitte^ .. hac vice) 499 Park Avenue New York, New York 10022 Telephone: (212) 328-6100 [email protected] Lead Counsel for Plaintiffs
Jan Graham (01231) GRAHAM LAW OFFICES Ambassador Plaza 150 South 600 East Suites SA & 5B Salt Lake City, UT 84102 Telephone: (801) 596-9199 [email protected] Associated Local Counsel for Plaintiffs
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EXHIBIT A Case 2:07-cv-00177-DAK Document 41-2 Filed 12/03/2007 Page 36 of 37
PLAINTIFF'S CERTIFICATION USANA HEALTH SCIENCES, INC.
I, Irina Sech, hereby declare under penalty of perjury that:
1. . Plaintiff has reviewed the complaint prepared by counsel and is willing to serve as a lead plaintiff or named plaintiff in the action based upon the allegations in that complaint or a substantively similar complaint or amended complaint to be filed. 2. I did not purchase the securities that are the subject of this action at the direction of plaintiffs counsel or in order to participate in this action. 3. I am willing to serve as a representative party on behalf of the class, including providing testimony at deposition and trial, if necessary. 4. My transactions during the Class Period (7/18/06-3/14/07) are as set forth below: Purchases Date of Purchases Number of Shares Purchased Price per Share
See Attached Schedule A
Sales Date of Sale(s) Number of Shares Sold Price per Share
See.Attached Schedule A
5. 1 have made no transactions that are the subject of this action except for those set forth above. 6. During the three years prior to the date of this Certification, I have not sought to serve or served as a representative party for a class action under the federal securities laws except in this litigation. 7. I will not accept any payment for serving as a representative party on behalf of the class beyond my pro rata share of any recovery, except such reasonable costs and expenses (including lost wages) directly relating to the representation of the class as ordered or approved by the Court. I understand that this is not a claim form, and that my ability to share in any recovery as a member of the class is unaffected by my decision to serve as a representative party. I declare under penalty of perjury that the foregoing is true and correct.
Executed this I day of , 2007
^^, "'" afore
Irina Sech Case 2:07-cv-00177-DAK Document 41-2 Filed 12/03/2007 Page 37 of 37
SCHEDULE A
Transaction :Price:Per Date (Puirchasi or Sak) No. Shares -Share` soo
c-7 P:j I