Wednesday, July 24, 2013

Citron Research Uncovers Thousands of Fraudulent USANA Associates Living in Mainland China

July 23, 2013 Citron Research has uncovered evidence that USANA Health Sciences, Inc (USNA) has recruited thousands of people from mainland China into their Multi-Level Marketing (MLM) compensation plan. A four month long investigation by Citron Research has revealed the enormity of the situation. China's direct selling laws prohibit any MLM business from operating in their country. However, USANA has been recruiting thousands of China's citizens by having them use an address from Hong Kong. In fact, thousands of these recruits used the same Hong Kong address with the sole purpose to circumvent China's laws and to try and hide under the radar.

Citron Research obtained genealogy reports of several top USANA associates whose downline consisted of thousands of associates all sharing the same address. This list contained email addresses and phone numbers of these associates. Every associate Citron contacted on that list that showed a Hong Kong address all actually live in mainland China.

When this was revealed last year by Citron Research, they only showed evidence of a couple associates from mainland China signed up under Ada Chai, a 2-star diamond director that USANA terminated shortly after the scheme was revealed. USANA quickly made a statement simply claiming they do business legally in mainland China through Babycare and never even bothered to address the fact that Chinese Nationals are being recruited into USANA through Hong Kong.

So USANA admits it is illegal for Chinese Nationals to sign up as a USANA distributor in Hong Kong because Ada Chai was terminated for the action. However, Ada's terminated was nothing more than lip service to shareholders and federal regulators because she was a scape goat. The fact of the matter is USANA has been fully aware of how massive this illegal activity is for the following reasons.

October 6, 2009 - USANA sends out internal memo contains the following information about mainland China USANA distributors: INTERNAL MEMO (rogue associates in mainland China)
VI. Question #6: Which market experienced the greatest sales growth from 2007-2008, and by how much?
i. Answer: East Asia (Hong Kong mainly and a little Taiwan), increased by almost $13 million.
ii. Things to look out for – rogue associates in Mainland China, trying to order US product.

IV. What is the biggest market that buys our products that we are not eligible to operate in?
i. Once again I couldn’t give you an exact answer on this. Since I work with our Asian markets, I know that a large sum of product ends up in China, but I’m sure product somehow gets shipped to other unauthorized markets as well...
July 28, 2011 - USANA CEO Dave Wentz admits during a financial conference call that a percentage of Hong Kong distributors are actually Chinese Nationals: TRANSCRIPT
question by John San Marco at Janney Montgomery Scott LLC:
"Do you know what the percentage of your Hong Kong associates that are actually Chinese nationals?"

USANA's Dave Wentz replies back with:
"We definitely have a number of people who are building in Hong Kong. We do not have a percentage or have a number that we could point to with any accuracy."

John San Marco asks USANA if there are any Chinese Laws that prevent Chinese Nationals from doing any sort of multilevel marketing outside their borders.

USANA's James Bramble responds with
"Well if an individual does not have residency in Hong Kong and the ability to build in Hong Kong, then they can only build in China."

November 29, 2012 - Citron Releases investigative report that reveals 2-star diamond director USANA associate Ada Chai actively participated in the recruitment of Chinese Nationals into her USANA downline. As a result of this report, USANA terminates Ada Chai. USANA: An Arresting Story by Citron Research

January 25, 2013 - USANA posts an internal memo that reveals the fact USANA allows associates to use the same address over 15 times: INTERNAL MEMO (associates using same address)

- First, as of January 26th the online enrollment system will not accept any address as a home address if that address has already been used by more than 15 other active associates.
          - Limited to main addresses only
          - however will not catch spelling or abreaviation differences
                - example: 123 Jon Boulevard vs. 123 Jon Blv.
          - The example would read as two different addressses
          - This will need to be evaluated and reported to compliance when noticed
          - This prohibition can be manually over-ruled by a DSR so that in the extremely rare circumstance that more than 15 associates truly do share the same address they simply need to enroll by phone.
          - A DSR will then verify that the address is really their address and can complete the enrollment.
DSR = Distributor Services Representative

March 10, 2013 - In USANA's 2012 10K SEC Filings the following statement was made regarding the November report by Citron Research: USANA 2012 10K SEC Filing
"More recently, in November 2012, we were again the target of false and misleading statements concerning our business practices, particularly in China and Hong Kong. This adverse publicity also adversely impacted the market price of our stock and caused insecurity among our Associates. There can be no assurance that we will not be subject to adverse publicity or negative public perception in the future or that such adverse publicity will not have a material adverse effect on our business, financial condition, or results of operations."
The report by Citron in November did not contain "false and misleading statements" because USANA terminated Ada Chai after the report was released.

July 23, 2013 - Citron Research uncovers THOUSANDS of USANA distributors living in mainland China: Creating a Criminal Conspiracy out of Your Own Customers by Citron Research

I personally believe USANA cannot plead ignorance because they play an active role in hiding the location of their distributors. USANA should disclose to shareholders the percentage of net sales that was the result of USANA distributors living in mainland China. Chinese authorities should revoke Babycare's direct selling license as a result USANA's strategic circumvention of their laws.