SAN DIEGO (CN) - Medifast, a "weight management" company, claims Barry Minkow, an ex-convict turned religious leader and fraud investigator, defamed it by accusing it of running a Ponzi scheme, and did it so he could profit by short-selling the company's stock.
Minkow served 7 years in federal prison for defrauding investors of about $100 million in his carpet-cleaning company, ZZZZ Best. He says he converted to Christianity in prison.
Medifast claims Minkow and his California-based Fraud Discovery Institute defamed it on the Internet by likening Medifast subsidiary Take Shape for Life's business to Bernie Madoff's.
In its federal complaint, Medifast claims Minkow defamed the subsidiary because he wanted to drive down the price of Medifast shares to profit by short-selling the stock after the attacks on the company's "otherwise stellar reputation."
Medifast claims that while Minkow and Fraud Discovery investigated it, he and his associates took a "short position" in the company's stock.
"Minkow founded FDI approximately five years ago," the complaint states. "FDI purports to be a fraud investigation company, but as the FDI Web site and Minkow's public statements make clear, the prominent purpose of FDI is to make money by taking short positions in companies' stock.
"FDI targets a publicly traded company and alleged to conduct a private investigation of that company, seeking evidence of alleged fraud. While investigating, Minkow and his associates take a short position in the target company's stock."
Medifast claims that Minkow and co-defendants Robert FitzPatrick, Tracy Cohen and former Los Angeles Times reporter William Lobdell created Web sites and blogs that claimed Medifast's products contained lead, that its auditors were untrustworthy and that its subsidiary promised income "based on success at endless chain recruiting" of "health coaches" in typical pyramid scheme fashion.
The defamatory allegations, Medifast says, included a comparison between the company and the recent subprime mortgage meltdown.
Medifast's stock closed in early February at just over $19, a 45 percent drop from its high of more than $35 before Minkow's attacks, according to the complaint.
Minkow and his associates have taken down the postings and have issued a statement saying that their investigation has ended, the complaint states.
Medifast demands $270 million in damages for libel, unfair business practices, and violations of California corporation, business and profession laws, and an injunction and disgorgement.
Medifast and its executive chairman Col. Bradley MacDonald are represented by Robert Giacovas with Lazare Potter & Giacovas of New York City.
Read the Top 8
Sign up for the Top 8, a roundup of the day's top stories delivered directly to your inbox Monday through Friday.