On September 19, 2013, Medifast (NYSE: MED) disclosed that on the previous day it consented to an entry of a Cease-and Desist Order and agreed to pay a $200,000 civil money penalty in connection with an "investigation" by the Securities and Exchange Commission into its improper financial reporting from 2006 to 2009. I reported that Medifast's press release and 8-K report made no mention that Brendan N. Connors, its former CFO and Marc G. Nochimson, the engagement partner who had supervised Medifast's audits for its former accounting firm, consented to the entry of separate Cease-and-Desist Orders which alleged improper conduct. Furthermore, I wrote that "I did not find any specific disclosure of the above referenced investigation in any of Medifast's previous filings with the S.E.C. I asked the company for an explanation via email, but it did not respond my request."
asked a reasonable question: "Was Medifast transparent with investors about an S.E.C. investigation?" based on underlying facts that were referenced in the S.E.C.’s three Cease-and-Desist Orders, Medifast’s S.E.C. filings and a certain press release). Medifast responded by having their lawyer Robert A. Giacovas send me a threatening legal letter. The letter cannot cite a single false or erroneous fact that it claims I published. Instead, it resorts to veiled threats, personal attacks, and innuendo in an attempt to distort the meaning of what I wrote and to bully me. [Read a copy of the letter from Robert A. Giacovas, Esq. here.]
Medifast's letter and my response
If I may be so bold as to summarize their lawyer’s letter, they are complaining that I “did not find any specific disclosure of the [SEC] investigation in any or Medifast’s previous filings with the S.E.C.” They claim “the Company cannot locate any email” from me asking them for an explanation. They requested that I forward them "the email that was supposedly sent to the Company and went unanswered." [Emphasis added.]
On September 20, 2013 at approximately 3:00 AM, I filled out an online inquiry for Medifast's Investor Relations Department:
Did Medifast make any PRIOR disclosure referenced in the 8-K report filed on 9/13/2013?
Here is the link:
I cannot find any disclosure by the company of the referenced SEC investigation PRIOR to the filing of the 8-K.
Please respond via email.
See the screen shot below (Click on image to enlarge it):
At about 3:01 AM ET, I received the following confirmation that my inquiry was received. See the screen shot below (Click on image to enlarge it):
In addition, on September 20, 2013 at 4:41 AM ET, I sent an email to Medifast’s Investor Relations Department which made the same request: [Read the full email here.].
Question: Did Medifast make any disclosure of the above referenced investigation into Medifast's financial reporting in its previous filings with the S.E.C.? I cannot find any reference to the above referenced investigation in any of Medifast’s filings with the S.E.C. prior to the filing of the 8-K report referenced above.
I’d appreciate a prompt answer to this question via email.
However, Medifast did not respond to me as of the time I published my blog 10 days later on September 30, 2013. If Medifast cannot find my online inquiry and email detailed above, I respectfully suggest that apparently either someone at the company is not being truthful to them or it has a problem with its information technology infrastructure.
Medifast's letter does not deny that it failed to report the existence of an S.E.C. investigation prior to the issuance of a Cease-and-Desist Order, press release, and 8-K filing. Instead, it explains that Medifast had no specific legal obligation to disclose such an investigation:
However, there is no statute, regulation, or rule that explicitly imposes an affirmative duty upon a public company to disclose the existence of an SEC investigation.
The letter says:
First, you state that you "did not find any specific disclosure of the [SEC] investigation in any of Medifast's previous filings with the SEC." The statement and your emphasis on the word "any" is clearly meant to convey that the Company has somehow not made proper disclosures to investors."
Apparently, the letter claims that I inferred that Medifast had broken the law by not reporting the existence of an ongoing investigation prior it consenting to the entry of a Cease-and-Desist Order. I made no such claim or inference. I asked a reasonable question: “Was Medifast transparent with investors about an S.E.C. investigation?” For example, many public companies report the existence of confidential S.E.C. investigations. Whether or not public companies should disclose the existence of ongoing S.E.C. investigations has been a matter of endless public debate. Therefore, even if we accept Medifast’s contention that by the letter of the law it was not required to report the existence of the S.E.C. investigation, it is still reasonable to ask a question about whether it was transparent with investors in communicating with them.
In addition, I reported that Medifast did not disclose in its press release and 8-K filing that its former CFO and the former engagement partner who supervised its audits also consented to the entry of separate Cease-and-Desist Orders. Their letter claims that I inferred that Medifast “purposely omitted mention of these other settlements." [Emphasis added]. As I detailed above, Medifast claimed that it had no specific legal obligation to report the S.E.C. investigation prior to it accepting the entry of a Cease-and Desist Order against it. Is Medifast now claiming it would have reported the other two Cease-and-Desist orders if they had known about them prior to its press release and filing of an 8-K report? If that is so, Medifast could have issued another press release and filed an amended 8-K report with the S.E.C. if it had chosen to do so. It did not.
The letter goes on to say that:
For your information, as a matter of policy, the SEC does not disclose the status of any investigations and settlement discussions with other potential parties (and it did not in this case).
The letter claims that:
The Company learned about details of those settlements at the same time as everyone else – when they were released by the S.E.C.
Those statements raise another reasonable question. Their letter is silent on whether Medifast knew that its former CFO and the engagement partner who supervised its audits were being simultaneously investigated by the S.E.C. Is Medifast inferring that it did not know that the S.E.C. was investigating its former CFO and the engagement partner who handled its audits until after it learned that they consented to the entry of Cease-and-Desist Orders? If Medifast did know that its former CFO and the engagement partner were being investigated by the S.E.C., wouldn't its lawyers be in contact with their lawyers to monitor the ongoing investigation? Again, these are reasonable questions based on the information presented.
Furthermore, Medifast, its former CFO, and the engagement partner who supervised its audits for its former accounting firm all consented to Cease-and-Desist Orders on the same day: September 18, 2013. The respective Cease-and Desist Orders entered against all three parties contain sequential Securities Exchange Act of 1934 file numbers, sequential Accounting and Auditing Enforcement Release numbers, sequential Administrative Proceeding file numbers, and sequential URLs to access them on the internet. A day later, on September 19 at around 9:19 AM Medifast issued a press release which reported its Cease-and-Desist Order, but omitted reference to the other two orders. Its 8-K filing with the S.E.C., which also omitted reference to the other two Cease-and-Desist Orders, was accepted by the S.E.C. later that same day at 4:59 PM. Based on that sequence of events, it’s a reasonable question to ask why Medifast did not disclose the two Cease-and-Desist Orders in its initial press release and 8-K report. In any case, as I suggested above, Medifast could have issued a new press release or filed an amended 8-K report disclosing the other two Cease-and-Desist orders if it chose to do so. It did not. There still remains a reasonable question to ask about whether Medifast was transparent in communicating with investors even if Medifast complied with S.E.C. reporting requirements on this issue. [Cease-and-Desist against Medifast, Cease-and-Desist against Brendan Connors, and Cease-and-Desist against Marc Nochimson]
What further amuses me about Medifast's bullying is their lawyer's apparent blundering. For example, the letter states:
Your post, which begins with the question – “Was Medifast transparent with investors about an S.E.C. investigation?” – then contains a number of statements that answers the question in the affirmative, thereby raising specter of some improper conduct by Medifast surrounding the entry of a cease and desist order with the Securities and Exchange Commission (“SEC’). [Emphasis added.]
Apparently, the letter erroneously claims that I answered my own question “in the affirmative” which means that I implied that Medifast engaged in proper conduct while it goes on to erroneously claim that I answered the question in the negative, meaning that Medifast engaged in improper conduct. I'm confused by their language. A company can follow the letter of the law and still not be transparent as I understand the term to mean. In any case, I did not say that Medifast was transparent or that it was not transparent. I simply asked a reasonable question about whether Medifast was transparent with investors and published the underlying facts accurately to help readers reach their own conclusion.
The letter references a certain defamation lawsuit Medifast brought against "...your friend and twice convicted felon Barry Minkow and (others)." I thought Minkow was a friend, but he is no longer a friend anymore and he has not been a friend for years. In any case, Medifast's defamation lawsuit against Barry Minkow was dismissed, although it is appealing the ruling. (See 10-Q report - Contingencies on page 14.)
Finally, Medifast requested that “And if you are truly interested in full transparency, you should publish this letter for your readers.” Well, I am interested in transparency. I made an upload of their letter available in the first paragraph of this blog, provided links to it several times above, and it can be uploaded here, too. In the spirit of the First Amendment to the Constitution of the United States, I welcome the debate. Back in 2012, I defended a government employee's right to free speech after he was fired for saying personal insults about me:
When Antar was asked about the critique of his talk and Mr. Kaplan’s firing his reaction was, “He has every right to voice his opinion of me. It was wrong for the City of Philadelphia to fire him for what he said about me."
In my humble opinion, Medifast appears to be thin-skinned. They are acting like crybabies. However, Medifast, like me has a constitutional right to the freedom of speech. Their opinions like mine here have a right to be heard. However, I will not allow them to bully me.
Sam E. Antar
I am a convicted felon and a former CPA. As the criminal CFO of Crazy Eddie, I helped my cousin Eddie Antar and other members of his family mastermind one of the largest securities frauds uncovered during the 1980's. I committed my crimes in cold-blood for fun and profit, and simply because I could. If it weren't for the heroic efforts of the FBI, SEC, Postal Inspector's Office, US Attorney's Office, and class action plaintiff's lawyers who investigated, prosecuted, and sued me, I would still be the criminal CFO of Crazy Eddie today. I do not want or seek forgiveness for my vicious crimes from my victims. My past sins are unforgivable.
There is a saying, "It takes one to know one." I've done professional work for the FBI, IRS, SEC, Justice Department, and other federal and state law enforcement agencies in training them to identify fraud and catch white-collar criminals. Often, I refer cases to them as an independent whistleblower. I teach white-collar crime classes for various government entities, professional organizations, businesses, and colleges and universities. Recently, I've helped the AICPA Fraud Task Force develop better methods for detecting fraud.
I do not own any Medifast securities long or short.