The report was penned by Barry Minkow, a stock-fraud felon turned private investigator, who has received praise from the FBI for previous probes. His latest report, however, has made Minkow the target of profiteering allegations.
Minkow acknowledged up front that he has bought "put'' options on USANA's shares in a bet the price will fall. And fall it did Thursday - 15 percent, or $8.92 a share - once The Journal published his allegations. Minkow then issued a news release about The Journal's scoop, and boasted about it on his Web site.
USANA President Dave Wentz said he was "flabbergasted" by Minkow's assessment that USANA is a pyramid scheme. And he was appalled that The Journal would rely on a source that stands to benefit financially by trashing the company. In response, USANA on Thursday hastily filed a defamation suit against Minkow and his company.
"This is one man's slanted view of our company, and he's got a pretty good PR campaign going," Wentz said. "I mean, he got The Wall Street Journal to put out all sorts of misinformation."
Editors from The Journal did not respond to questions about the story by Tribune deadlines Thursday night. The article's writer, Keith J. Winstein, declined comment.
USANA is like Amway Corp., The Journal article said, in that it uses at-home distributors, or "associates," to sell products and pays commissions through a multilevel marketing plan.
According to The Journal, about 86 percent of USANA's revenue comes from sales to its 153,000 associates. Only 14 percent comes from sales to customers who do not sell it to others. Last year, the company earned $41 million on sales of $374 million. As of the end of 2005, only 37 percent of USANA's associates had ever earned a commission, according to the company's latest figures. Among those who had been paid, the figures show, 87 percent didn't earn enough to cover the $116 they have to purchase or refer each month to qualify for commissions.
Minkow claims USANA's multilevel marketing model is a pyramid scheme and cannot be sustained because it requires the constant recruitment of new associates who are asked to sell products that are much more expensive than those of their competitors.
USANA's Wentz said it is ironic that The Journal would repeat Minkow's allegations about sustainability then compare USANA to Amway, which has been around for 50 years.
Wentz claims Minkow "made up numbers" for his report, but wouldn't elaborate. He said the company is preparing a detailed response.
In a telephone interview Thursday, Minkow said he stands by his investigation. And he defended the put options on USANA's stock as a way to offset the cost of his investigation of the company, which he said involved lab testing of its vitamins and supplements, going undercover to attend company meetings and wiretaps.
Any money he stands to make "pales in comparison to the millions" officers and directors have made from unsuspecting distributors and shareholders, Minkow said.
Joseph Mariano, executive vice president and chief operating officer for the Direct Selling Association, takes exception to Minkow's assessment of USANA's business model and the underlying assumption that all multilevel marketing businesses are scams. Mariano also disputed The Journal's contention that, under a formula devised by the Federal Trade Commission, the company would escape classification as a pyramid scheme if at least 63 percent of its sales were ''retail."
A pyramid operation is one in which people are compensated merely for the act of recruitment, Mariano said.
USANA "has a viable product sold by informed salespeople," he added, noting that Wentz is vice chairman of the DSA.
"It's a proven model used to sell everything from supplements to cosmetics to telephone service to scrapbook supplies," Mariano said. "It's not only a sustainable model, it's a successful model."
lfantin@sltrib.com
