Where the Fraud in USANA is Likely Occurring
The potential evidence of fraud within USANA will likely exist in their Chinese operating subsidiary, Babycare LTD, where over 50% of USANA’s total sales are derived from. Babycare was indirectly acquired in 2010 for $62 million.
Per 2010 8-K, “ The Company acquired Pet Lane, Inc., a Delaware corporation (“Pet Lane”), which is the record owner of BabyCare in China. Simultaneously, the Company entered into and closed a share purchase agreement (the “Purchase Agreement”) by and among the Company and the following parties: Pet Lane; Yaolan Ltd., an exempted company organized under the laws of the Cayman Islands (“Yaolan”); and BabyCare Holdings, Ltd., an exempted company organized under the laws of the Cayman Islands (“BabyCare Holdings”).”
**Importantly, Babycare has been in existence since 1999 and was unable to turn a profit. From 1999 to basically 2010, Babycare had a traditional retail sales model.
Per 2010 8-K, “Historically, BabyCare has not been profitable under its retail-based model, but is in the process of transitioning to operate under its direct selling license”.
Overarchingly, the business model of BabyCare in China is fundamentally different then that of Usana’s in the U.S. and the rest of their markets. USANA is quite transparent in explaining the dynamics of their sales force in the U.S., they group their ‘customers’ in to Associates or Preferred. Simply, Associates can both buy and sell USANA products, while Preferred customers can only buy products for personal use. Preferred customers can become Associates through purchasing a $30 starting kit, and Associates are compensated through a threshold based sales volume structure. The structure in China is different and unclear, those interested in selling products in China must first join as China Preferred Customers(CPCs).
Per 2017 10-K, “ individuals who join BabyCare must initially join as a China Preferred Customer, or CPC. CPCs are similar to Preferred Customers in our other markets, but CPCs also have the right in China to refer other CPCs and receive rebates on future product purchases based on the volume of product purchased by CPCs they have referred… While BabyCare utilizes a business model that has been developed specifically for China in light of applicable China laws and regulations, BabyCare’s model has not been formally approved by the Chinese government.”
The above is the only level of description that is provided for USANA’s Chinese operations, they clearly admit that the structure is fundamentally different. Further, the use of rebates and discounts via purchases of those they refer potentially aligns BabyCare’s operations to that of a MLM scheme. I.E. Compensation via recruitment. Individuals, who join BabyCare must first purchase products which enable them to become China Preferred Customers. These are clear signs of a Pyramid Scheme, and what is troublesome is that these practices do not occur outside of their Chinese operations. The only source of growth for USANA has come out of China, where the least amount of insight and transparency is provided.
I would like to call USANA’s Chinese operations an outright fraud, and in direct violation of Chinese law, but the company just does not give enough detail into their Chinese operations. The above is the main crux of the insight that is provided for their Chinese operations which I believes carries the highest possibility of fraud.
**Note in China in order to participate in a direct selling operation you must be a Chinese citizen. Watch this video to understand the leaps and bounds that MLM companies must go through in order to try to have a legal operation in China.
In mid 2017 a seekingalpha article was published claiming that 3 Babycare executives were arrested, bank accounts were frozen, and the company was in the midst of massive fraud and deception allegations.
Chief Scientist Officer
Their current CSO, Robert A. Sinnott joined USANA in 2016 as Chief Scientist Officer. He previously held executive roles at Mannatech( Co-CEO, CSO), a MLM marketing firm which was ridden with allegations of fraud mainly involving false allegations that their products successfully treated cancer and aids patients. Clearly a company of even lesser quality than USANA.
