Investors Call Nu Skin Illegal Pyramid Scheme
SALT LAKE CITY (CN) - Nu Skin's stock price plummeted upon accusations that it ran a pyramid scheme in China and brainwashed distributors, shareholders claim in two class actions.
Lead plaintiffs Robert Freedman and Bruce Bennett sued Utah-based Nu Skin Enterprises, its CEO M. Truman Hunt and CFO Ritch Wood, in Federal Court.
The plaintiffs claim the multilevel marketer issued "false and misleading reports, releases and public statements," inflating the price of its stock after the Chinese newspaper People's Daily accused it of running an illegal pyramid scheme.
Pyramid schemes-in which original "members" recruit new ones, who recruit newer ones, with more money flowing to the top-are illegal in China.
To conceal a company's financial conditions so as to "deceive the investing public," also violates the Securities Exchange Act, the plaintiffs say in both lawsuits.
Nu Skin specializes in so-called "premium-quality" anti-aging personal care products and nutritional supplements, and operates worldwide.
According to Bennett's complaint: "Throughout the class period [Oct. 25, 2011 to Jan. 15, 2014], defendants made materially false and misleading statements regarding the company's business, operational and compliance policies. Specifically, defendants made false and/or misleading statements and/or failed to disclose that: (i) the company's operations in the People's Republic of China ('PRC') engaged in pyramid selling schemes in violation of PRC law; and (ii) as a result of the above, the company's financial statements were materially false and misleading at all relevant times."
People's Daily, a Communist Party mouthpiece, broke news of the alleged scheme this month, and it was reported her by California short seller Citron Research.
People's Daily "further reported that the company brainwashes its trainees and sells 104 products, 20 more than the Chinese government allows," Freedman says in his complaint.
Bennett's lawsuit adds: "On Aug. 7, 2012, Citron Research published an analyst report alleging that Nu Skin's operations in the People's Republic of China are nothing more than a pyramid scheme based on multilevel marketing where such schemes are strictly prohibited in China.
"On this news, Nu Skin stock declined $6.90 per share or over 14 percent, within two trading sessions, to close at $41.96 per share on Aug. 8, 2012.
"On Feb. 14, 2013, the Federal Trade Commission published over 200 pages of documents pursuant to a request under the Freedom of Information Act for consumer complaints regarding Nu Skin from the past five years.
"As a result, Nu Skin's stock declined $0.99 per share or 2.3 percent, to close at $42.93 per share on Feb. 14, 2013.
"On Jan. 15, 2014, a leading Chinese newspaper reported that the company operates an illegal pyramid scheme in China, and employs unlawful and immoral business practices in violation of PRC law.
"In response to that news, the company's stock declined $20.78 or 15.2 percent to close at $115.23 [sic] on volume of 9,899,600 shares.
"Then, on Jan. 16, 2014, the company disclosed that its business practices were indeed under investigation by Chinese authorities, stating in relevant part:
'We are aware that Chinese regulators have now initiated investigations to review issues raised by recent news reports. The government regularly monitors all businesses in this rapidly growing marketplace, and as is our practice, we will continue to communicate openly with regulators to address any questions they may have.'
"On this news the company's stock declined $30.22 or 26.2 percent to close at $84.80 on extremely high volume of 20,441,025 shares."
Neither lawsuit explains the apparent spikes in share price amid the declines.
Nu Skin Enterprises, which operates under the Nu Skin and Pharmanex brands, "has become very dependent on China for a very significant amount of its revenue and its growth," according to the Freedman lawsuit.
Mainland China accounted for 30 percent of the company's $2.16 billion in sales during the first nine months of 2013, his 25-page complaint states.
"While the company issued numerous public statements discussing its positive results and increased guidance, especially in light of new product introductions and increased sales in greater China, it failed to disclose either its fraudulent sales practices and noncompliance with laws and regulations in China, or their potential impact on the company," Freedman claims.
Hunt, Nu Skin's president and CEO; and Wood, the CFO, are the only individual defendants.
"Defendants were personally motivated to make false statements and omit material information necessary to make the statements not misleading in order to personally benefit from the sale of Nu Skin securities from their personal portfolios," Bennett claims.
The plaintiffs seek class certification, damages and costs.
Freedman is represented by Jeffrey Golan with Barrack, Rodos & Bacine of Philadelphia, and Thomas Karrenberg with Anderson & Karrenberg.
Bennett is represented by Jeremy Lieberman with Pomerantz of New York City; and Mark James with Hatch, James & Dodge.