USANA Sued for Fraud and Deceit

Stephen Barrett, M.D.


A lawsuit seeking class action status has been filed in California State Court on behalf of thousands of individuals who became "Associates" (distributors) of USANA Health Sciences Inc. on or after January 1, 1995 in California. The plaintiffs accuse USANA and several of its officers and directors of fraud and deception. Among other things, the suit alleges USANA (a) exaggerated the business opportunity, (b) failed to disclose that 87% of active distributors were losing money, (c) misrepresented the credentials of its advisory board, and (d) basically operated a pyramid scheme requiring a constant churn in its sales force. The lawsuit seeks damages for distributors left with thousands of dollars of losses each after paying for business “kits” and products they say they couldn’t sell. Earlier this year, similar class-action suits were filed on behalf of shareholders.


SUPERIOR COURT OF THE STATE OF CALIFORNIA
FOR THE COUNTY OF SAN DIEGO, NORTH COUNTY BRANCH

JEANNETTE JOHNSON and CHRISTOPHER
CRANE, Individually and On Behalf of All Others
Similarly Situated,

Plaintiffs,

v.

USANA HEALTH SCIENCES, INC., DENIS E.
WAITLEY, CHRISTINE WOOD, LADD
McNAMARA, DEBORAH WAITLEY-McNAMARA,
MYRON W. WENTZ, DAVID A. WENTZ, and
GILBERT A. FULLER, and DOES 1-50, inclusive,

Defendents


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CASE NO.

CLASS ACTION COMPLAINT

1) Penal Code § 327 (Endless Chain)

2) Business and Professions Code
    § 17200 (Unfair Business Practices)

3) Fraud and Deceit (Concealment)

4) Business and Professions Code
    § 17500 (False Advertising

 

Plaintiffs, Jeannette Johnson and Christopher Crane, on behalf of themselves and all others similarly situated, and demanding trial by jury, complain and allege upon information and belief the following:

NATURE OF THE ACTION AND OVERVIEW

1. This is a class action on behalf of all individuals or entities who at anytime between January 1, 1995, through the present, inclusive (the “Class Period”), were USANA Associates.

2. USANA develops and manufactures nutritionals, personal care, and weight management products that are sold directly to Associates throughout California.

3. Prior to and throughout the Class Period, USANA represented itself to be a highly successful company, based on integrity, with a history of record earnings and a solid business model. However, on or about March 15, 2007, The Wall Street Journal revealed the underlying unsustainability of the Company’s network marketing business model, and that the Company was perpetrating a pyramid scheme in an attempt to sell its products.

4. Plaintiffs allege that, throughout the Class Period, Defendants failed to disclose material adverse facts about the Company, its business relationships, and prospects. Specifically, Defendants failed to disclose and fraudulently concealed the following: (1) that the Company’s multi-level marketing model operated as a pyramid scheme; (2) that 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; (3) that the majority of the Company’s Associates did not actually sell to consumers, but rather to other Company Associates; (4) that over 74 percent of the Company’s Associates were failing within the first year of joining the Company; (5) that over 87 percent of the Company’s Associates were losing money instead of receiving compensation for their sales efforts; (6) that the Company lacked adequate internal and financial controls; (7) that, as a result of the foregoing, the Company’s statements about its future business prospects and projections were lacking in a reasonable basis when made; (8) that 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; for example, a 28 day supply of premium vitamins sells at GNC for $17 and USANA’s premium multivitamin “Essentials” sells for $40; (9) that Associates would be less, not more, profitable if they opened up more than one “business center” because the only true benefit inured in the Company’s favor because of the increased costs the Associates paid for additional business centers; (10) that 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 (11) that 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.

JURISDICTION AND VENUE

5. This is a civil action seeking damages, attorneys’ fees and other relief. Jurisdiction as to each Defendant is proper in the County of San Diego pursuant to the provisions of California Code of Civil Procedure Sections 395(a) and 395.5. One or more of the Defendants either maintains an office, transacts business, has an agent, or is found in the County of San Diego. Many of the unlawful acts alleged occurred or caused injury to purchasers of nutritionals, personal care, and weight management products within the State of California and, more particularly, within the County of San Diego. Defendants’ trade and commerce hereinafter described is carried on, in part, within the State of California and, more particularly, within the County of San Diego. Plaintiffs believe Defendants have sold substantial amounts of products to the residents of San Diego County.

6. Plaintiffs’ claims also arise and are brought pursuant to Business and Professions Code Sections 17203 and 17204 for restitution and/or disgorgement of all revenues, earnings, profits, compensation and benefits obtained by Defendants as a result of their unlawful, unfair or fraudulent business acts or practices alleged herein as prohibited by Business and Professions Code Section 17200, et seq., commonly known as the Unfair Competition Law (“UCL”). Defendants’ violations of the UCL include business acts and practices constituting distinct and independent violations of the UCL independent of their violations of other laws.

7. This Complaint is not based upon federal law. The amount in controversy for each named class representative is less than $75,000, and the aggregate total of the claims pled herein is less than $5,000,000.

8. Venue as to each Defendant is proper in this judicial district, pursuant to Business and Professions Code Section 17203 and California Code of Civil Procedure Sections 395(a) and 395.5. Each Defendant either transacts business, has an agent, or is found in the County of San Diego and is within the jurisdiction of this Court. The unlawful acts alleged herein had a direct effect on consumers within the State of California and, more particularly, within the County of San Diego. Additionally, the trade and commerce described herein is carried on, in substantial part, in the State of California and, more particularly, within the County of San Diego.

9. Plaintiffs reserve the right to amend this Complaint if after a reasonable opportunity for discovery, additional persons are found to be liable, or if any of the other allegations or requests in this Complaint should be amended to conform to such discovery or conform to proof at trial.

PARTIES

10. Plaintiffs, Jeannette Johnson and Christopher Crane, are residents of San Diego County, California, purchased USANA distributorships and thus became Associates, and lost money or property as a direct result of the violations alleged herein.

11. Defendant USANA is a Utah corporation with its principal place of business located at 3838 West Parkway Boulevard, Salt Lake City, Utah. It distributes products, in part, through a multi-level marketing scheme with the slogan “True Health & True Wealth.”

12. Defendant Denis E. Waitley was, at all relevant times, a Company director, and a resident of Rancho Santa Fe, California. Mr. Waitley falsified his educational credentials to potential Associates of the Company and to the SEC, stating he had a Master’s Degree and Ph.D when in fact he did not.

13. Defendants Christine Wood of Del Mar, California, Ladd McNamara of Oceanside, California and Deborah Waitley-McNamara of La Jolla, California, are all members of the Company’s Advisory Board and directors. Each of these Defendants actively participated in promoting the Company’s multi-level marketing scheme, with Ms. Wood appearing on the Company’s online video presentation. On or about June 4, 2007, Mr. McNamara was forced to resign from the Advisory board because it was uncovered that he was practicing medicine without a license.

14. Defendant Myron W. Wentz (“M. Wentz”) was, at all relevant times, the Company’s Chief Executive Officer (“CEO”). Mr. Wentz has allegedly renounced his U.S. citizenship and transferred significant assets to the tax havens of St. Kitts and Nevis, the Isle of Mann, and Liechtenstein.

15. Defendant David A. Wentz (“D. Wentz”) was, at all relevant times, the Company’s President and a Company Director, and a graduate of the University of California, San Diego.

16. Defendant Gilbert A. Fuller (“Fuller”) was, at all relevant times, the Company’s Chief Financial Officer (“CFO”), Chief Accounting Officer (“CAO”), and an Executive Vice President. On June 13, 2007, USANA filed SEC Form 8-K in which it disclosed that although Mr. Fuller was formerly and consistently reported to be a CPA, in fact he was not, as his license had expired in 1986.

17. The Individual Defendants, because of their positions with the Company, were provided with copies of the Company’s reports, opportunity meeting agendas, and press releases alleged herein to be misleading prior to, or shortly after, their issuance, and had the ability and opportunity to prevent the misrepresentations 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 were each group-published information, the result of the collective actions of the Individual Defendants and others. Additionally, each individual Defendant herein had a direct stake in the success of the USANA network marketing scheme, and gave substantial assistance or encouragement thereto in order to make more money.

JOINT VENTURE, ALTER EGO, CO-CONSPIRATOR AND DOE DEFENDANTS

18. At times, each of the Defendants named herein, including DOES 1-50, acted as the agent, joint venturer or alter ego of or for the other Defendants with respect to the acts, violations, and common course of conduct alleged herein or is otherwise liable.

19. The acts charged in this Complaint as having been done by Defendants and the DOE Defendants were authorized, ordered, or done by their officers, agents, employees, or representatives, while actively engaged in the management of the Defendants’ businesses or affairs.

20. Various persons named as Defendants have participated or acted in furtherance of the violations alleged herein, including acting as co-conspirators. When and if Plaintiffs learn the identity of additional persons, Plaintiffs may seek leave to amend this Complaint to add said co-conspirators as Defendants.

21. Pursuant to Business and Professions Code ' 17200 et seq., Plaintiffs bring this action individually and on behalf of the general public.

CLASS ACTION ALLEGATIONS

22. Plaintiffs, Jeannette Johnson and Christopher Crane, brings this action, on behalf of themselves and all others similarly situated, as a class action pursuant to Section 382 of the California Code of Civil Procedure. The Plaintiff Class, which Plaintiffs seek to represent, is composed of and defined as follows:

All persons or entities who are citizens of the State of California and which at anytime between January 1, 1995 and the present were an Associate of USANA. Specifically excluded from the Plaintiff Class are the Defendants herein; officers, directors, or employees of any Defendants; any entity in which any Defendant has a controlling interest; the affiliates, legal representatives, attorneys, heirs or assigns of any Defendant. Also excluded are any federal, state or local governmental entity, and any judge, justice, or judicial officer presiding over this matter and the members of their immediate families and judicial staffs.

23. This action has been brought and may properly be maintained as a class action, pursuant to the provisions of Code of Civil Procedure Section 382 because there is a well defined community of interest in the litigation and the proposed class is ascertainable.

24. Numerosity: The Plaintiff class is so numerous that the individual joinder of all members is impracticable under the circumstances of this case. While the exact number of class members is unknown to Plaintiff at this time, based upon the amount of sales of such products, Plaintiff is informed and believes that thousands of dollars worth of products have been sold to hundreds of distributors. Joinder of all members of the Plaintiff Class is not practicable.

25. Common Questions Predominate: Common questions of law and fact exist as to all members of the Plaintiff Class and predominate over any questions which affect only individual members of the class. These common questions of law and fact include, without limitation:

a. Whether Defendants conspired to operate a pyramid scheme, or endless chain under Penal Code § 327;

b. Whether Defendants’ business acts or practices violated the Unfair Competition Law, §§ 17200 et seq. of the California Business and Professions Code (“UCL”);

c. Whether Defendants are liable for fraudulent concealment;

d. Whether Defendants are liable for violating Business and Professions Code § 17500;

e. The class-wide nature of Defendants’ course of conduct;

f. The amount of additional revenues and profits obtained by Defendants attributable to their unlawful conduct;

g. The appropriate nature of class-wide equitable relief including injunctions and corrective and remedial action;

h. Whether the members of each Plaintiff Class are entitled to rescission and restitution as a result of Defendants’ conduct and, if so, what is the proper measure and appropriate formula to be applied in determining such restitution;

i. Whether the members of each Plaintiff Class have sustained damages as a result of Defendants’ conduct and, if so, what is the proper measure and appropriate formula to be applied in determining such damages; and

j. Whether the members of each Plaintiff Class are entitled to punitive and exemplary damages as a result of Defendants’ acts of fraud, malice and oppression or in conscious disregard of the rights of Plaintiffs and each Plaintiff Class, and, if so, what is the proper amount of such punitive and exemplary damages.

26. Typicality: Plaintiffs’ claims are typical of the claims of the members of the Plaintiff Class because Plaintiffs and each member of the Plaintiff Class was an Associate of USANA, purchased nutritionals, personal care, and weight management products from one or more of the Defendants, and due to the violations alleged herein, suffered injury thereby as a result of Defendants’ common course of conduct in violation of law as alleged herein.

27. Adequacy: Plaintiffs will fairly and adequately protect the interests of the members of the Plaintiff Class. Plaintiffs are citizens of and reside in California and purchased in San Diego County, nutritionals, personal care, and weight management products during the Relevant Period, were USANA Associates, lost money or property as a result thereof, and are adequate representatives of the Plaintiff Class as they have no interests that are adverse to the interests of absent class members. Plaintiffs have retained counsel who has substantial experience in the prosecution of complex class action and consumer protection litigation.

28. Superiority: A class action is superior to other available means for the fair and efficient adjudication of this controversy since individual joinder of all members of the Plaintiff Class is impracticable. Class action treatment will permit a large number of similarly situated persons to prosecute their common claims in a single forum simultaneously, efficiently, and without the unnecessary duplication of effort and expense that numerous individual actions would engender. Furthermore, as the monetary injuries suffered by each individual member of the class may be relatively small, the expenses and burden of individual litigation would make it difficult or impossible for individual members of the class to redress the wrongs done to them. Additionally, an important public interest will be served by addressing the matter as a class action. The cost to the court system of adjudication of such individualized litigation would be substantial. Individualized litigation would also present the potential for inconsistent or contradictory judgments.

29. Plaintiffs are unaware of any difficulties that are likely to be encountered in the management of this action that would preclude its maintenance as a class action.

PATTERN OF CONDUCT

30. Beginning at a time unknown, but not later than January 1, 1995, Defendants formulated a secret plan to generate substantial revenues from the sale of multivitamins and other products. The plan was designed to convert money from a large number of USANA recruits and redistribute that money to those at the top of the pyramid of Associates. The plan used the lure of making money from home in order to sell such multivitamins and other products at highly inflated prices. In essence, Defendants convinced individuals to purchase products at inflated prices and informed them that they could offset the cost of such products by becoming a USANA Associate and opening one or more business centers. Defendants focused on the success of several insiders, such as Defendants McNamana, Wood, and Waitley-McNamara, who had allegedly made approximately $50,000 per year in commissions. Defendants also stated that if enough effort was put in, with multiple business centers, commissions of $100,000 per year was attainable. In fact, Defendants’ website claimed “unlimited earning potential.” Even the “average” distributor would be amply rewarded.

31. Defendants and others had mass gatherings, called “opportunity meetings” to promote the high earning potential of becoming a USANA Associate. These opportunity meetings had a cult-like atmosphere where individuals told of their financial success and the “financial security” USANA provides. Potential recruits were also enticed by allegedly low start-up costs for signing up to be an Associate, with costs as low as $19.95. USANA promised “True Health & True Wealth” at these opportunity meetings, yet the only true wealth was found in the initial perpetrators of the scheme, i.e., those who were at the top of the pyramid.

32. If a USANA Associate complained about the difficulty in selling the high priced products, their “upline” Associate was taught to sell them additional materials which allegedly would assist in making them profitable. USANA’s practice was to make unsuccessful Associates feel as if the lack of profit was due to their own inadequacies, as others were extremely profitable. Yet in fact, 87% of Associates were losing money, a fact fraudulently concealed from new recruits.

33. USANA and its recruiters knew no bounds. The promotions targeted both the elderly and the not-so-well-off. USANA’s online presentation states that … 40% of Aging Americans are not sure if they have enough money to retire. Half of all bankruptcies are caused by illness or medical bills. The average household owes $8,000 in credit card debt, with most people living paycheck to paycheck, “Change your life”, let USANA be your retirement solution, without high start up costs or complex business plans. You work for yourself not by yourself… Yet, once those on the lower level of the pyramid inevitably failed, they truly were by themselves.

34. In one instance, the Fraud Discovery Institute of San Diego uncovered an extremely egregious example. An elderly blind man lost his life savings and mortgaged his home in a failed effort to realize the USANA dream of true wealth. In fact, contrary to the statements made at opportunity meetings, Defendants fraudulently concealed and never disclosed to potential Associates that 74% of Associates failed in the first year. As a publicly traded Company, and because Defendants’ touted the potential profitability of its Associates, Defendants had a duty to disclose these adverse facts, yet never did. Like a true pyramid scheme, the initial members of USANA made money from recruiting others, who recruited others, and so on. However, those further down the line were doomed to fail. As shown by recent events, USANA’s business was built on misrepresentations and concealment, which have caused the Plaintiffs and members of the Class to lose money.

35. Regarding the Company’s distribution and marketing system, the Company’s Form 10-K, in relevant part, stated:

Distribution and Marketing

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. The emergence of readily available means of mass communication, such as personal computers, facsimiles, low-cost long distance telephone services, satellite conferencing and the Internet, has contributed to the rapid growth of network marketing. The concept of network marketing is based on the strength of personal recommendations that frequently come from friends, neighbors, relatives, and close acquaintances. We believe that network marketing is an effective way to distribute our products because it allows person-to-person product education, which is not as readily available through other distribution channels.

A person who wishes to sell USANA products must join our independent sales force as an Associate. A person becomes an Associate by completing an application under the sponsorship of an existing Associate. The new Associate then becomes part of the sponsoring Associate’s downline sales organization. New Associates sign a written contract and agree to adhere to the USANA policies and procedures. New Associates are also required to purchase a starter kit that includes a detailed manual, including our policies and procedures.

* * *

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 be qualified to earn commissions or bonuses under USANA’s Compensation Plan. [Emphasis added.]

36. The fact that one could qualify for commissions by personal use brings USANA’s business model within the parameters of a pyramid scheme or endless chain under Penal Code § 327. Furthermore, USANA either intentionally or negligently failed to adopt the necessary internal practices in order to insure that the Company was not operating as a pyramid scheme.

37. Regarding the sustainability of the Company’s business model, the Company’s Form 10-K, in relevant part, stated:

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 leads. 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.

38. Regarding the Company’s compensation plan for its associates, the Company’s Form 10-K, in relevant part, stated:

Attractive Associate Compensation Plan and Benefits

We are committed to providing a highly competitive compensation plan to attract and retain Associates who constitute our sales force. We believe the USANA Associate compensation plan (the “Compensation Plan”) is one of the most financially rewarding in the network marketing industry. Associate incentives totaled $146.3 million, or 40.1% of net sales for the Direct Selling segment in 2006. We pay Associate incentive weekly and our Compensation Plan is a global-seamless plan, meaning that Associates can be compensated each week for their business success in any market in which we conduct business. To support our Associates, we sponsor meetings and events throughout the year, which offer information about our products and our network marketing system. These meetings are designed to assist Associates in business development and to provide a forum for interaction with successful Associates and the USANA management team. We also provide low cost sales tools, which we believe are an integral part of building and maintaining a successful home-based business for Associates.

39. The statements contained in ¶¶ 30 – 38 were materially false and misleading when made because Defendants failed to disclose or indicate at least the following: (1) that 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; (2) that the Company’s multi-level marketing model operated as a pyramid scheme; (3) that the majority of the Company’s Associates did not actually sell to consumers, but rather to other Company Associates; (4) that over 74 percent of the Company’s Associates were failing within the first year of joining the Company; (5) that over 87 percent of the Company’s Associates were losing money instead of receiving compensation for their sales efforts; (6) that the Company lacked adequate internal and financial controls; and (7) that, as a result of the foregoing, the Company’s statements about its future business prospects and projections was lacking in a reasonable basis when made.

FIRST CAUSE OF ACTION

Violation of California Penal Code § 327

Pyramid Scheme/Endless Chain

40. Plaintiffs, Jeannette Johnson and Christopher Crane, on behalf of themselves and all others similarly situated, incorporate and reallege paragraphs 1 through 39 above, as though fully set forth herein.

41. California Penal Code § 327, clearly defines a pyramid scheme or endless chain as a crime against public decency and good morals:

Every person who contrives, prepares, sets up, proposes, or operates any endless chain is guilty of a public offense, and is punishable by imprisonment in the county jail not exceeding one year or in state prison for 16 months, two, or three years.

As used in this section, an ‘endless chain’ means any scheme for the disposal or distribution of property whereby a participant pays a valuable consideration for the chance to receive compensation for introducing one or more additional persons into participation in the scheme or for the chance to receive compensation when a person introduced by the participant introduces a new participant.

Compensation, as used in this section, does not mean or include payment based upon sales made to persons who are not participants in the scheme and who are not purchasing in order to participate in the scheme.

42. As stated in Defendant USANA’s 10-K, in order to qualify for commissions or bonuses, a distributor must either resell products to consumers or personally use such products. In practice, the distributor is taught and does sell almost exclusively to new participants in the scheme because USANA must consistently recruit new Associates, or personally uses the relevant products. Thus, distributor sales to actual retail consumers were less than 50%. Furthermore, USANA lacks the internal controls to insure that the Company is not operating as a pyramid scheme. This is a direct violation of Penal Code § 327.

43. Plaintiffs have suffered injury in fact and have lost money or property as a result of Defendants’ business acts, omissions and practices as alleged herein.

44. Plaintiffs, and all those similarly situated, accordingly are entitled to equitable relief including injunctive relief, remedial or corrective action, full restitution and/or disgorgement.

45. Plaintiffs seek class certification of this cause of action as a class action, on behalf of all those similarly situated, pursuant to CCP § 382.

SECOND CAUSE OF ACTION

For Violation of the Unfair Competition Law, California

Business and Professions Code §§ 17200 et seq.

(On Behalf Of The Class For Unfair, Unlawful, and Deceptive Business Practices

Against All Defendants)

46. Plaintiffs, Jeannette Johnson and Christopher Crane, on behalf of themselves and all others similarly situated, incorporate and reallege paragraphs 1 through 45 above, as though fully set forth herein.

47. Plaintiff may plead and/or prove violation of any law under the unlawful prong. “The unlawful practices prohibited by section 17200 are any practices forbidden by law, be it civil or criminal, federal, state, or municipal, statutory, regulatory, or court-made.” Saunders v. Superior Court (1994) 27 Cal.App.4th 832, at pp. 838-839.

48. Defendants have violated Penal Code § 327 and Business and Professions Code § 17500.

49. All of Defendants’ marketing, advertising, publicity, promotional and sales and repair efforts including, but not limited to, that as described herein, constitutes unfair competition, in violation of California Business and Professions Code §§ 17200 et seq., the Unfair Competition Law ("UCL"). Defendants have and continue to engage in conduct that is unfair and unlawful, through a pattern of misrepresentations and concealments that mislead and deceive the public with respect to the true nature of its products and services, by a pattern of failing to inform and by misleading the public about the saleability of its products and services through false and misleading statements and wrongful policies, procedures and acts.

50. Beginning at a time unknown to Plaintiffs, but believed to go back at least through the Class Period, Defendants have engaged in a pattern of using the prospect of earning significant income from home as an enticement to lure persons into becoming USANA distributors, targeting at times the elderly and the not-so-well-off. In fact, Defendants fail to disclose the fact that very few persons made money at such distributorships, and only the very top of the pyramid made substantial amounts. One of Defendants’ reasons for the scheme is to mask the excess prices charged for Defendants’ products by convincing distributors the cost will be lowered by their commission.

51. Defendants have also engaged in the other illegal practices alleged herein, such as fraud, deceit and concealment.

52. The foregoing acts and omissions of Defendants, as set forth hereinabove, constitute and continue to constitute unfair business practices within the meaning of section 17200 et seq. of the California Business and Professions Code.

53. The effect on Plaintiffs and upon the Plaintiff Class is that the Plaintiffs and the Plaintiff Class lost money and were also overcharged for the products purchased.

54. As a direct result of the conduct of the Defendants—whether unlawful, unfair, or deceptive—as herein alleged, Plaintiffs and the Plaintiff Class have lost money and have been overcharged for products purchased directly from Defendants.

55. Plaintiffs have suffered injury in fact and have lost money or property as a result of Defendants’ business acts, omissions and practices as alleged herein.

56. Plaintiffs, and all those similarly situated, accordingly are entitled to equitable relief including injunctive relief, remedial or corrective action, full restitution and/or disgorgement.

57. Plaintiffs seek class certification of this cause of action as a class action, on behalf of all those similarly situated, pursuant to CCP § 382.

THIRD CAUSE OF ACTION

(On Behalf Of The Plaintiff Class For Fraud and Deceit Against All Defendants)

58. Plaintiffs, Jeannette Johnson and Christopher Crane, on behalf of themselves and all others similarly situated, incorporate and reallege paragraphs 1 through 57 above, as though fully set forth herein.

59. Plaintiffs allege that, throughout the Class Period, Defendants failed to disclose material adverse facts about the Company, its business relationships, and prospects. Specifically, Defendants failed to disclose and concealed the following: (1) that the Company’s multi-level marketing model operated as a pyramid scheme; (2) that 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; (3) that the majority of the Company’s Associates did not actually sell to consumers, but rather to other Company Associates; (4) that over 74 percent of the Company’s Associates were failing within the first year of joining the Company; (5) that over 87 percent of the Company’s Associates were losing money instead of receiving compensation for their sales efforts; (6) that the Company lacked adequate internal and financial controls; (7) that, as a result of the foregoing, the Company’s statements about its future business prospects and projections were lacking in a reasonable basis when made; (8) that 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; for example, a 28 day supply of premium vitamins sells at GNC for $17 and USANA’s premium multivitamin “Essentials” sells for $40; (9) that Associates would be less, not more, profitable if they opened up more than one “business center” because the only true benefit inured in the Company’s favor because of the increased costs the Associates paid for additional business centers; (10) that 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 (11) that 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.

60. Defendants’ concealed from the Plaintiffs and the Plaintiff Class the true facts. The true facts were that Defendants operated a pyramid scheme, 74% of Associates failed in the first year, and 87% of Associates were losing money, even though the Plaintiffs and the Plaintiff Class ordered and paid for premium product, Defendants would instead supply the Plaintiffs and the Plaintiff Class with similar product to that found in any retail store, that USANA did not provide “True Wealth”, and that the Company’s stability was questionable as evidenced by Myron Wentz’s attempt to insulate himself from the jurisdiction of the United States judicial system.

61. Defendants intended that the Plaintiffs and the Plaintiff Class rely upon the omissions and false representations set forth in the USANA website, promotional materials, and at opportunity meetings. The Plaintiffs and the Plaintiff Class reasonably relied upon Defendants’ misrepresentations and they agreed to enter into individual standardized agreements to become USANA Associates and to purchase USANA product at premium product prices.

62. As a direct result of the fraud and deceit of the Defendants, as herein alleged, the Plaintiffs and the Plaintiff Class were injured in that they lost money and were overcharged by Defendants for products.

63. In doing the acts heretofore mentioned, Defendants acted maliciously, fraudulently, oppressively, and/or in conscious disregard of the rights of the Plaintiffs and the Plaintiff Class. The acts of the Defendants were despicable in that Defendants intended to take money away from the Plaintiffs and the Plaintiff Class and stick that money in their own pocket, while knowing full well that they were not entitled to that money. The Plaintiffs and the Plaintiff Class seek exemplary and punitive damages against the Defendants in an amount to be determined at the trial of this matter.

64. Plaintiffs seek class certification of this cause of action as a class action, on behalf of all those similarly situated, pursuant to CCP § 382.

FOURTH CAUSE OF ACTION

Violation of Business and Professions Code §§ 17500 et seq.

(On Behalf of the Plaintiff Class Against All Defendants)

65. Plaintiffs, Jeannette Johnson and Christopher Crane, on behalf of themselves and all others similarly situated, incorporate and reallege paragraphs 1 through 64 above, as though fully set forth herein.

66. Section 17500 of the California Business and Professions Code makes it unlawful for any person, firm, corporation or association, or any employee thereof, with the intent to induce the public to enter into any obligation, to make or disseminate or cause to be made or disseminated in any newspaper or other publication, or any advertising device, or by public outcry or proclamation, or in any other manner or means whatever, including over the Internet, any statement which is untrue or misleading, and which is known, or which by the exercise of reasonable care should be known, to be untrue or misleading.

67. Plaintiffs allege that, throughout the Class Period, Defendants failed to disclose material adverse facts about the Company, its business relationships, and prospects. Specifically, Defendants failed to disclose and concealed the following: (1) that the Company’s multi-level marketing model operated as a pyramid scheme; (2) that 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; (3) that the majority of the Company’s Associates did not actually sell to consumers, but rather to other Company Associates; (4) that over 74 percent of the Company’s Associates were failing within the first year of joining the Company; (5) that over 87 percent of the Company’s Associates were losing money instead of receiving compensation for their sales efforts; (6) that the Company lacked adequate internal and financial controls; (7) that, as a result of the foregoing, the Company’s statements about its future business prospects and projections were lacking in a reasonable basis when made; (8) that 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; for example, a 28 day supply of premium vitamins sells at GNC for $17 and USANA’s premium multivitamin “Essentials” sells for $40; (9) that Associates would be less, not more, profitable if they opened up more than one “business center” because the only true benefit inured in the Company’s favor because of the increased costs the Associates paid for additional business centers; (10) that 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 (11) that 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.

68. Defendants have violated Section 17500 of the California Business and Professions Code in several respects. Defendants represent that their business model eliminates 75% of middleman costs. In fact, since each tier of the pyramid receives approximately 8% in commissions, the result is prices for Defendants’ product are 50% - 400% of competitive pricing. Defendants’ Internet website falsely advertises in their “opportunity” section that the Company provides an incredible experience for unlimited earning potential. Defendants have further violated Section 17500 of the California Business and Professions Code by making untrue or misleading statements on its Internet website. The true fact of the matter is as stated herein and that USANA has concealed material information, certain of its highest officers, employees and directors lack credibility, the founder has put assets offshore, and the pyramid scheme is bound to fail.

69. Each of the members of the Plaintiff Class relied on these untrue and misleading statements or omissions disseminated via Internet website, advertising materials, and/or at opportunity meetings.

70. As a direct result of the foregoing facts, Plaintiffs and the Plaintiff Class have suffered injury in fact, and have lost money or property as a result of Defendants’ business acts, omissions, and practices as alleged herein.

71. Pursuant to the provisions of Section 17535 of the California Business and Professions Code, Plaintiffs, and others similarly situated, are entitled to injunctive relief, and to be restored any money or property, which may have been acquired by Defendants by means of the violations of Section 17500 of the California Business and Professions Code, as alleged herein.

72. Plaintiffs seek class certification of this cause of action as a class action, on behalf of all those similarly situated, pursuant to CCP § 382.

WHEREFORE, Plaintiffs and the other members of the Class pray for relief as follows:

a. That this action be certified and maintained as a class action under California Code of Civil Procedure Section 382;

b. That Plaintiffs and the members of the Class be awarded all damages determined to have been sustained by them as a result of Defendants’ conduct as complained of herein, and that joint and several judgments be entered against each Defendant for the amount so determined;

c. That the Court rescind the Associate Agreements and award restitution and/or order disgorgement in favor of the Plaintiff Class through its equitable powers and through the provisions of California statutes;

d. That the Plaintiffs and members of the Class be awarded punitive and exemplary damages based on the conduct of the Defendants;

e. That the Court enjoin the subject conduct and enter an injunction prescribing such conduct including remedial relief;

f. That the Court issue an injunction preventing the Defendants from transferring any money or other assets outside the United States, and such other equitable relief as it deems necessary;

g. That the Court award Plaintiffs and the members of the class prejudgment interest at the maximum legal rate;

h. That the Court award Plaintiffs and the members of the Class costs of this action, including reasonable attorneys’ fees; and

i. That the Court give Plaintiffs and the members of the Class all other relief as the Court deems just and proper.

JURY TRIAL DEMANDED

Plaintiffs hereby demand a jury trial.

Respectfully submitted,

LAW OFFICES OF ALEXANDER M. SCHACK
16870 West Bernardo Drive, Suite 400
San Diego, CA  92127
Tel: (858) 485-6535

Dated: June 20, 2007

________________________________
Alexander M. Schack
Attorneys for Plaintiffs Jeannette Johnson,
Christopher Crane, and the Plaintiff Class

This article was posted on July 23, 2007.

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