Courts • Provo-based company’s dealings violated Chinese law.
A federal judge on Thursday gave final approval to a settlement in a shareholder lawsuit against Nu Skin Enterprises in which the company agreed to pay $47 million over allegations it had operated an illegal pyramid scheme in China which it failed to disclose, even as it reported soaring earnings.
The Provo-based multi-level marketer of personal care products and nutritional supplements reached the settlement earlier this year and U.S. District Judge Jill Parrish on Thursday gave final approval, and also Ok’d a distribution plan and awarded attorney fees. Nu Skin said it and individual officers named in the lawsuit continue to deny the allegations.
Nu Skin was sued after Chinese authorities cracked down on its operations following allegations that Nu Skin was operating a multi-level marketing scheme in violation of the country’s laws.
A multi-level marketing business model uses a network of independent distributors who earn bonuses for recruiting others into the company. The lawsuit alleged the scheme depends on the company’s ability to constantly recruit new distributors to replace those who quit and move into new markets when older ones slow. Such operations are legal in some form or another in most countries, but not China.
The lawsuit alleged that in order to offset slow growth in Nu Skin’s major markets, the company in 2011 “put on steroids” its MLM operation in China. But it also failed to disclose to shareholders what it was doing to jack up sales, and each quarter touted its remarkable growth in revenue, the suit alleged.
By the end of 2013, Nu Skin’s sales in China reached more than $1 billion, and its shares soared.
Individual defendants, including CEO Truman Hunt and CFO Ritch Wood, then unloaded about $40 million in shares at an inflated price, the lawsuit claimed.
In January of 2014, a Chinese newspaper alleged violations of Chinese laws and authorities launched investigations, though the company has pointed out the government did not find violations of its MLM laws.
In September, however, Nu Skin agreed to pay the Securities and Exchange Commission about $766,000 to settle allegations that a Chinese employee had paid about $154,000 to a charity in order to influence a high-ranking Chinese Communist Party official. The payment was made to affect the outcome of an investigation into the company’s operations in a Chinese province, the SEC said.
Parrish on Thursday also granted $13.6 million in attorney fees, or 29 percent of the settlement. The New York firm of Labaton Sucharow provided lead attorneys for the plaintiffs.