Thursday, March 04, 2010

Open Memo to Medifast Board Chairman Bradley T. MacDonald and Chief Executive and CFO Michael S. McDevitt: Q4 2009 Earnings Call Questions

To Bradley T. MacDonald and Michael S. McDevitt:

On Thursday, March 4, 2010 at 11:00 AM ET you are scheduled to discuss Medifast's (NYSE: MED) fiscal year 2009 and Q4 2009 financial reports in a conference call. Medifast has a golden opportunity to come clean to investors and dispel serious allegations of improprieties concerning Medifast's business model, marketing practices, and financial disclosures made in reports issued by Fraud Discovery Institute, co-founded by convicted felon turned fraud fighter Barry Minkow.

Rather than address those concerns, a few weeks ago Medifast and Bradley T. MacDonald acted like bullies and filed a multi-million dollar lawsuit alleging defamation by Fraud Discovery Institute, its co-founder Barry Minkow, pyramid scheme expert Robert L. FitzPatrick, acclaimed forensic accountant and book author Tracy Coenen, best-selling author and former investigative journalist William Lobdell (who now writes for iBusiness Reporting, a blog funded by Fraud Discovery), and an anonymous Yahoo message board poster. However, as I noted in my previous open letter:

Like your complaints to investors and securities regulators, your lawsuit fails to provide a detailed and credible substantive line-by-line rebuttal of serious allegations of improprieties concerning Medifast's business model, marketing practices, and financial disclosures made in reports issued by Fraud Discovery Institute....
Instead, the lawsuit reads like a cheaply produced late-night infomercial for insomniacs, rambles about the purported "health" benefits of Medifast products, and rants that Fraud Discovery Institute's reports are false. To support your claims of defamation, the lawsuit refers to self-serving claims on Medifast's website and disclosures in SEC filings which certain Defendants allege are false and misleading.

Why not show some balls, stop hiding behind your lawyers, and answer ten simple questions posted by defendant William Lobdell on the iBusiness Reporting Blog? See Lobdell's blog post reprinted below.

Please note that I modified question 3 to also ask about the median income of coaches and question 4 to also ask about the median length of time that coaches remain active.

10 simple answers from Medifast could dispel allegations that it relies on pyramid-style selling
Tuesday, February 23, 2010 at 03:35PM
By William Lobdell
Medifast's lawsuit filed last week against the Fraud Discovery Institute and its associates (including me) alleges defamation because the business model for its Take Shape for Life program does not rely largely on an endless recruitment of independent sales people, or "coaches."
Medifast could prove this by answering 10 simple questions that would show the recent rapid revenue increase for its Take Shape for Life program can be attributed to the sale of its products, and not the recruitment of citizen sales people. (Medifast's competitors, which don't use multi-level marketing, have suffered declines in sales during the recession.)
1. On its website, Medifast has advertised two income scenarios: one based on the coach selling the meal replacements to clients, the other based on the coach recruiting new coaches. One showed $8,000 a month in income, and the latter, $20,000 a month. What percentage of all coaches who have worked for Medifast over the years have earned either of those illustrated income examples
2. What is the average income of all coaches from product sales to clients, not from bonuses and commissions derived from recruiting other coaches who recruit other coaches who recruit other coaches?
3. What is the average monthly income and median income of all coaches who were enrolled during a year, not just the active ones?
4. What is the average and median length of time that all coaches to remain active?
5. In total, how many people have been coaches over the last five years?
6. Medifast advertises that financial health is a key element for success in losing weight and offers its "coaching" program as the prime means for achieving financial health. What is the average net profit to the coaches gained from sales to clients, factoring in all normal business costs (i.e., advertising)?
7. What percentage of all coaches earn more per month than the costs of the product and related business expenses?
8. The Medifast pay plan rewards coaches to recruit more coaches. The majority of commissions, per sale, are transferred to recruiters in the upper levels, making recruiting more lucrative than retailing. When are there too many coaches in any given area? Is the sales force expected to grow without limits in all market areas?
9. What percentage of coaches remain active sellers/recruiters after one year? After two years?
10. Are coaches given estimates of the cost of the business, historical dropout rates and average incomes gained from direct-selling commissions vs. recruiting-based commissions? [Emphasis added.]

If you fail to answer the above questions, you will look like sissies who lack the transparency that you claim to espouse to investors and the general public. Minkow and the other Defendants will certainly ask these questions in future interrogatories and subpoena such information in discovery to defend themselves against your allegations in the lawsuit.

A Seeking Alpha blogger noted:

A few months back, some of the enlightened teleprompter readers on CNBC went after anonymous/pseudonymous financial bloggers, such as Tyler Durden at They argued that his ideas and analysis couldn't be taken seriously, because his identity was a mystery. Good thing our founding fathers didn't take that ignorant position. Because if they had, the Federalist Papers would not have contributed to what our Constitution became, nor illuminated it's interpretation. I can see it now; these empty-headed talking heads in powdered wigs, saying, "Who's this Publius guy?"
And even if you reveal your identity, as Sam Antar and Barry Minkow have, you can be shouted down because of something you have said or done in your past. (Both Barry and Sam are convicted felons, former white-collar criminals, who now spend their time exposing present day fraudsters.) They are easy targets, which makes me appreciate their efforts even more.
Individuals who don't like what these men say about the management at companies like (OSTK) or Prepaid Legal Services (PPD), often cannot refute the truth of Sam or Barry's analysis. Instead, they attack the credibility of messenger, and thus, change the debate. When their pasts aren't being rehashed, their motives are being impugned. ("He's just trying to bash the stock, so his hedge fund buddies can make money on their short positions!")
The subject is no longer the accounting irregularities of the company in question, but the crimes the investigator committed many years ago, or speculation about some kind of conspiracy he might be involved in. Call it smoke and mirrors, or a shell-game, but the effect is to distract observers from the real issue. I am saddened when I see readers being suckered by these transparent ploys.

Like (NASDAQ: OSTK) as it relates to me and Prepaid Legal (NYSE: PPD) as it relates to Minkow, you are apparently unable to refute any of Minkow's allegations concerning your company. Instead, you have adopted the "attack the messenger" approach in an attempt to deflect attention away from serious questions about Medifast raised in Fraud Discovery's reports.

I note that is under investigation by the Securities and Exchange Commission and recently restated its financial reports for the third time in three years and a result of violations of Generally Accepted Accounting Principles (GAAP) exposed in my blog. In addition, Prepaid Legal was recently subpoenaed by the SEC as part of a "fact-finding inquiry."

Hypocritically, your lawsuit also complains about various alleged insults directed at co-plaintiff Bradley T. MacDonald that were posted an anonymous person on the Yahoo message boards. However, in January 2007 Barron's reported that MacDonald himself was posting anonymously on that same message board touting Medifast and attacking critics:

...Barron's has learned, Medifast's board has become concerned about Internet postings, under the name, in support of Medifast on the Yahoo! Finance message board. People in a position to know say that this is a pseudonym and that MacDonald was the author of these messages.

You can act bravely and come clean with investors now or act like cowards and the Courts will force you to come clean later.


Sam E. Antar


I am a convicted felon and a former CPA. As the criminal CFO of Crazy Eddie, I helped Eddie Antar and other members of his family mastermind one of the largest securities frauds uncovered during the 1980's. I committed my crimes, simply because I could.

If it weren't for the 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 own Medifast securities short or long. Barry Minkow and I are close personal friends. From time-to-time, I do research on scam companies for Fraud Discovery Institute. However, this open memo, like my previous open memo, is an unsolicited freebie. In any case, please feel free to subpoena me and otherwise complain about me, too. See if I care.

I do not own or Prepaid Legal securities short or long. My research on and in particular its lying CEO Patrick Byrne is a freebie for securities regulators and the public in order to help me get into heaven, though I doubt that I will ever get there anyway. I will probably end up joining corporate miscreants such as Patrick Byrne in hell.

Analyzing's financial reporting is a forensic accountant's wet dream and Patrick Byrne is about to become the SEC's new orgasm.

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