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Was Medifast transparent with investors about an S.E.C. investigation?

About two weeks ago, Medifast (NYSE: MED) disclosed that 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 financial reporting from 2006 to 2009. However, 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, consented to the entry of separate Cease-and-Desist Orders which alleged improper conduct. Furthermore, 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.

Medifast pays a $200,000 civil penalty

Both Medifast's press release and identical 8-K report did not mention that its former CFO and the engagement partner who supervised its audits had consented to the entry of separate Cease-and-Desist Orders. They only stated that:

On September 18, 2013, Medifast, Inc. (the “Company”) reached a settlement with the Securities and Exchange Commission (the “SEC”) in connection with an SEC investigation of certain items in the Company’s financial statements for the years 2006 through 2009 that led to the Company’s restatement of such financial statements in 2010 and 2011. Under the settlement, the Company, without admitting or denying the SEC’s findings, consented to the entry of a cease-and-desist order prohibiting the Company from committing or causing any violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934, as amended, and Rules 12b-20 and 13a-1 thereunder and agreed to pay a civil penalty of $200,000. As noted in the order instituting the proceeding, the SEC considered the remedial acts undertaken by the Company, including its enhancement of internal controls and retention of additional accounting personnel. [Emphasis added.]

According to the Cease-and-Desist Order entered against Medifast, it understated income tax expense from 2006 to 2008 and it overstated revenue and understated certain other expenses from 2008 to 2009. It said:

Medifast’s improper accounting practices and internal controls deficiencies resulted in Medifast filing periodic reports with the Commission for the years 2006 through 2009 which materially overstated its income and understated its expenses. [Emphasis added.]

For example, Medifast "did not comply with FAS 109" governing the proper accrual of income tax expense and deferred tax liabilities. From 2006 to 2008, Medifast understated income tax expense and "materially" overstated net income "by an average of 12.4% over the three affected years." The order revealed that Medifast's internal income tax calculations did not match up to the numbers it reported:

9. Moreover, Medifast’s reported income tax provision in its Form 10-Ks for the years 2007 and 2008 were not supported by Medifast’s internal income tax provision worksheets for those years. These worksheets were used to calculate the Company’s current and deferred taxes at year-end for financial statement and GAAP purposes. [Emphasis added.]

According to a separate Cease-and-Desist Order entered against former CFO Brendan N. Connors, his income tax calculations did not match the numbers Medifast reported in its financial reports:

9. In addition, Connors’ tax calculations as entered on the Tax Spreadsheets differed materially from the current and deferred income tax provisions that were reported in Medifast’s Form 10-K filings. On the Tax Spreadsheet for 2007, for example, Connors calculated the Company’s current tax provision as $1,805,708 and a total deferred tax asset of $1,079,321. In contrast to those numbers, however, Medifast’s Form 10-K for 2007 reported the current income tax provision as $1,233,000 and a deferred tax expense of $473,000. On Medifast’s Tax Spreadsheet for 2008, Connors calculated a current income tax provision of $2,578,107 and a total deferred tax asset of $1,321,072, but Medifast’s Form 10-K for 2008 reported the current income tax provision as $1,711,000 and a deferred tax expense of $704,000.

10. In fact, both the reported figures for Medifast’s income tax provision in its 2007 and 2008 Forms 10-K and the tax provision calculations prepared by Connors on the Company’s Tax Spreadsheets for those years were wrong, and Medifast’s income tax expense increased significantly... [Emphasis added.]

In other words, the S.E.C. said that Medifast reported a lower income tax provision than was calculated by Connors is 2007 and 2008. Both the reported numbers and calculations ended up to be wrong, but in the end Medifast still understated its income tax expense and materially overstated net income.

Former Medifast CFO Brendan Connors to pay a $40,000 civil penalty to settle Cease-and-Desist Order

Back on November 12, 2012, Medifast disclosed that Brendan N. Connors resigned as its CFO "to pursue other interests." No mention was made of any S.E.C. investigation or possible improper conduct in its press release. Chairman and Chief Executive Officer, Michael C. MacDonald gave him a nice sendoff stating:

“On behalf of our employees and the Board we would like to thank Brendan for his contributions to the growth of Medifast over the last seven years,” commented Mr. MacDonald. [Emphasis added.]

However, the Cease-and-Desist Order entered against Connors said that:

Connors’ improper conduct resulted in Medifast filing periodic reports with the Commission for the years 2006 through 2008 that materially understated its tax expense and overstated its net income after tax. [Emphasis added.]

Furthermore, the Cease-and-Desist order said that:

...the Commission finds that Connors violated Rule 13b2-1 of the Exchange Act and willfully aided and abetted and was a cause of Medifast’s violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-thereunder. [Emphasis added.]

Connors consented to the entry of a Cease-and Desist Order "without admitting or denying the findings...." The S.E.C. usually settles such actions without an admission or denial. As part of the settlement, he agreed to pay a $40,000 "civil money penalty" and was "...denied the privilege of appearing or practicing before the Commission." He can request a reinstatement after one year. Connors is a Certified Public Accountant.

Cease-and-Desist Order entered against audit engagement partner Marc G. Nochimson

The Cease-and-Desist order entered against audit engagement partner Marc G. Nochimson, said he:

...engaged in improper professional conduct pursuant to Rule 102(e)(1) by failing, in several instances, to comply with the PCAOB Standards in conducting Medifast’s 2006, 2007 and 2008 financial statement audits.... [Emphasis added.]

Nochimson consented to the entry of a Cease-and Desist Order "without admitting or denying the findings...." The S.E.C. usually settles such actions without an admission or denial. As part of the settlement, Nochimson was "denied the privilege of appearing or practicing before the Commission as an accountant." He can request a reinstatement after one year.

Marc G. Nochimson was a partner at Bagell, Josephs, Levine & Company LLC, Medifast's former auditors. In January 2010, Bagell, Josephs, Levine combined with Friedman LLP which took over as Medifast's auditors. Nochimson joined Friedman LLP when the firms combined. On April 16, 2010, Medifast dismissed Friedman LLP and hired McGladrey & Pullen, LLP/RSM McGladrey of Baltimore MD to perform audit and tax services.

Written by:

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 with 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.


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