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A federal judge has found that investors' claims of securities fraud, cover-up and insider trading involving Nature's Sunshine Products are legally sufficient, denying the company's motion to dismiss the April 2006 class-action lawsuit.
U.S. District Judge Ted Stewart's decision, issued Monday, means the case can proceed to the discovery phase, allowing attorneys for the plaintiffs to seek documents and conduct interviews to build their case. Stewart ruled against the Provo-based supplement maker on all but one matter, limiting the scope of claims to acts that occurred on or after March 15, 2005. Investors insisted the so-called scheme to deceive independent auditors about company financials dated back to April 23, 2002.
Nature's Sunshine New York City spokesman Steven Anreder downplayed the ruling as routine and reiterated the company's position.
"We disagree with the allegations in the complaint and we expect to successfully defend them on the merits," Anreder said Monday.
Phillip Kim, a New York City attorney representing investors, agreed that it is standard procedure for defense attorneys to attack the validity of legal claims and request a dismissal, and courts routinely reject those motions. But, Kim said, Monday's ruling is significant because the court determined the complaint met the heightened pleading requirements set forth in the Private Securities Litigation Reform Act of 1995.
Under the law, securities fraud claims must contain sufficient facts to provide a reasonable belief that the allegations are true. To bolster their case, NSP investors used correspondence from the audit firm KPMG, which resigned as the company's independent auditor in April 2006 after the company refused to fire its CEO and remove a key board member despite evidence both men knew about likely illegal acts within the firm's foreign operations and didn't tell auditors.
The March 2006 letters cited in the lawsuit tell of an internal investigation that showed CEO Douglas Faggioli knew about "an alleged fraud," twice made "false misrepresentations" to the independent auditing firm about it, and "approved a payment in violation of the Foreign Corrupt Practice Act."
The letters claim board member Franz Cristiani, then chairman of the audit committee, knew about the falsehoods, failed to correct them and understood they "could pose a significant problem to our company." KPMG also noted that certain illegal acts appear to have had a material effect on the financial statements of NSP. In April 2006, the company announced it would likely restate financial reports for the past four years and would not meet SEC deadlines for reporting its latest numbers, causing Nasdaq to delist the stock.
Shortly after, investors, many of whom bought stock in Nature's Sunshine based on glowing financial reports, seized on the revelations and sued, claiming company officials mislead them while selling off $2.9 million in their own stock before the share price plummeted.