Barry Minkow Gives Medifast the Middle Finger

If Medifast (NYSE: MED) thought that a lawsuit and complaints to the Securities and Exchange Commission against certain critics would get them to back down and retreat from criticizing the company, they are badly mistaken. This morning, Fraud Discovery Institute co-founder Barry Minkow effectively gave Medifast the middle finger by releasing a very detailed and potentially devastating report by pyramid scheme expert Robert L. FitzPatrick detailing additional allegations of potentially serious improprieties concerning Medifast's business model, marketing practices, and financial disclosures to investors in reports filed with the SEC. (Robert L. FitzPatrick’s 18 page report can be downloaded here).

Note: Convicted felon Barry Minkow (co-founder of Fraud Discovery) has publicly disclosed holding short positions in Medifast securities. As a successful fraud investigator, Minkow has uncovered over $1.8 billion of fraud involving over twenty companies and has received an official commendation from the FBI for his work in uncovering crime. Minkow and I are close personal friends and I do research work for Fraud Discovery on InterOil and Medifast's auditors, but I do not own any securities in InterOil or Medifast, long or short.

FitzPatrick’s report alleges that Medifast has a "troubled history" of "making false and misleading claims regarding its products" and takes aim at the company's Take Shape for Life (TSFL) division, which is responsible for Medifast's recent growth in revenues and profits. Fraud Discovery's press release alleges that Medifast's TSFL division is effectively a multi-level marketing scheme involving:

... pyramid-style selling - is unsustainable and will lead to a revenue trajectory similar to other multi-level marketing companies: dizzying initial expansion followed by lackluster revenue or worse.....

[Snip]

Despite heady starts, revenues from multi-level marketing companies usually slow or fizzle out all together because the business model relies mostly on an endless recruitment of independent salespeople, most of whom make little or no money.

[Snip]

"Only a business model that relies on recruitment of new sales associates by promising income in a down economy - and not the sales of its product - can explain Medifast's revenue anomaly and more importantly, that deviation from the norm is unsustainable and can't continue because Medifast will not be able to keep recruiting a large army of sales associates."

While Medifast sells hope to new sales associates (most of whom lose money), in 2009 Medifast insiders dumped $11.5 million of company stock and just a few days ago, Shirley MacDonald, wife of Medifast Executive Chairman Bradley T. MacDonald dumped 133,402 company shares and pocketed $4.69 million.

Medifast Filed Lawsuit

In February 2010, Medifast 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 massage board poster.

In an open letter Medifast Board Chairman Bradley T. MacDonald and Chief Executive and CFO Michael S. McDevitt, I suggested that they grow some hair on their chests and "stop acting like whining cry babies to investors, securities regulators, and now, the federal courts." I noted that:

...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.

The defendants have since filed, what is known as, Anti-Slapp motions claiming that Medifast is attempting to limit their First Amendment right of free speech under the United States Constitution (Details here and here). In her blog, Tracy Coenen noted:

SLAPP stands for Strategic Lawsuit Against Public Participation.  It’s basically when a big company tries to shut up a little guy with expensive litigation. In my opinion, Medifast sued me and others in an attempt to get us to stop publicly analyzing or criticizing the company and it’s multi-level marketing business model.

In filing an anti-SLAPP motion, we are essentially asking the court to rule in our favor and in favor of free speech. Consumers should have the right to discuss, analyze, and criticize companies without the fear of expensive lawsuits.

In 2008, Fraud Discovery and Minkow won a similar Anti-Slapp motion filed by USANA (NASDAQ: USNA) and they were awarded legal fees to reimburse them for defending that company's frivolous lawsuit.

Responding to Medifast's recent lawsuit against himself, FitzPatrick wrote in his report that:

Medifast has recently characterized inquiries and critical examinations of its business model and marketing tactics as “attacks.” It has sought to silence me and others by means of a lawsuit in which Medifast has accused me of defamation, vilified my character, publicly denigrated my credentials and sought to silence me and others. This lawsuit has had a chilling effect on my willingness to continue to report and has created fear and concern for those I might collaborate with. It has inhibited communications and placed a financial and administrative burden on me that interferes with continued research and writing.

However, because truth is an absolute defense and my speech involves issues of public interest, I refuse to be bullied from accurate reporting. Of even greater importance is that one of the goals of my research and writing is to provide findings of fact to governmental agencies responsible for protecting consumers from companies involved in questionable business practices. Producing accurate information on multi-level marketing schemes that may prove valuable to regulatory agencies such as the FTC, SEC or state attorneys general and which may lead to governmental actions in consumer protection is a compelling reason for my continuing to investigate, analyze and produce reports such as this one. [Emphasis added.]

Whistleblowers like Minkow, FitzPatrick, Coenen, and Lobdell have the balls that certain simpletons and pussies working at the SEC simply don't have. The SEC needs more knowledgeable and hard working people like Richard Simpson, who successfully prosecuted the Crazy Eddie fraud and is now lead counsel in the SEC's cases against Goldman Sachs (NYSE: GS) and Sponge Tech (NASDAQ: SPNG).

Instead, there are certain rogue elements within the SEC who would much rather intimidate or ignore whistleblowers such as David Einhorn, Harry Markopolos, and others. Those naughty elements reward whistleblowers by biting the hand that feeds them. It seems that no good deed goes unpunished by the SEC, while the regulator continues to allow many corporate miscreants to go unpunished, too.

I'll have more to say about that issue, soon.

Written by:

Sam E. Antar

Recommended Reading:

TheStreet.com: SEC Doesn't Deserve to Exist by Gary Weiss

Disclosure:

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 am planning to go straight to hell for my unforgivable crimes. However, certain other corporate miscreants won't meet me there due to indifference, incompetence, laziness, and a lack of balls by certain pussies and rogue elements working at the SEC.

Barry Minkow has publicly disclosed that he holds a short position in Medifast securities. From time-to-time, I do research for Fraud Discovery Institute on certain companies, such as InterOil and Medifast's former auditors. However, I do not own InterOil or Medifast securities long or short.

iBusiness Reporting is a division of Fraud Discovery.

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 zerohedge.com. 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 Overstock.com (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 Overstock.com (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 Overstock.com 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 bradmed@verizon.net, 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.

Respectfully,

Sam E. Antar

Disclosure:

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 Overstock.com or Prepaid Legal securities short or long. My research on Overstock.com 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 Overstock.com's financial reporting is a forensic accountant's wet dream and Patrick Byrne is about to become the SEC's new orgasm.

Open Memo to Medifast Board Chairman Bradley T. MacDonald and Chief Executive and CFO Michael S. McDevitt: Grow Some Hair on Your Chest

To Bradley T. MacDonald and Michael S. McDevitt:

You both need to grow some hair on your chests and stop acting like whining cry babies to investors, securities regulators, and now, the federal courts. Yesterday, Medifast (NYSE: MED) and Bradley T. MacDonald 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 massage board poster (download lawsuit here and here).

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, co-founded by convicted felon turned fraud fighter Barry Minkow.

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.

The lawsuit alleges that Barry Minkow orchestrated an illegal scheme to drive down the stock price of Medifast shares to profit from short selling. However, Minkow has a first amendment right to critique or to use your words "bash" Medifast, notwithstanding the fact that he publicly disclosed that he holds a short position in your company and is a convicted felon. Minkow's opinion and analysis is backed up by very detailed reports prepared for Fraud Discovery Institute by Mr. FitzPatrick and other data made fully available to the public for examination and scrutiny.

The Defendants will certainly assert "truth" as a defense to claims of defamation made against them in this lawsuit. That same kind of truth led a federal Judge in Utah to dismiss Usana's (NASDAQ: USNA) frivolous defamation claims against Fraud Discovery and Barry Minkow and award them legal fees covering their Court costs.

I remind you that discovery in civil litigation is a two-way street. Minkow and the other Defendants can now subpoena all of Medifast's books, records, and documents and closely scrutinize them to look for any possible improprieties and irregularities in defending themselves in this litigation. In addition, they can subpoena documents from Medifast's auditors, vendors, customers, and other business relationships. You and others will be subject to sharp questioning under oath in pre-trial depositions by the Defendant's attorneys. Now Medifast's business documents will ultimately become subject to close public examination and careful scrutiny if this case goes to trial.

I doubt that Minkow and the other Defendants are concerned about Medifast subpoenaing their documents and taking their sworn testimony. In any case, it will be interesting to see if Medifast is afraid to be transparent and moves for a protective order to quash any public examination and scrutiny of discovery information obtained by Minkow and the other Defendants.

One more thing, Medifast and MacDonald are suing an anonymous Yahoo message board poster known as "Medisdead" claiming for example, that:

Medisdead has defamed MacDonald by referring to him as "Pimp Daddy Brad."

You guys need to develop a "thick skin" rather than waste your time on message board postings. Some of your anonymous message board supporters have made anti-Semitic attacks and other libelous personal attacks on me and Minkow. Unlike you, Minkow and I are not complaining about them. At this time, we certainly don't blame you for such attacks, though some of those persons may be in contact with certain Medifast employees and/or business associates.

Instead of growing hair on your chests, it seems that you've chosen the route of premature baldness and grey hair. Regarding Medifast and certain of its business associates, I believe that this litigation will be disproportionately more time consuming, distracting, costly, and far more risky as compared to the Defendants in this legal action. You never know what kind of potential future trouble that a "needle in a hay stack" found in discovery by the Defendants can cause for Medifast and certain of its business relationships.

For a personal reference about me, just ask Overstock.com (NASDAQ: OSTK) CEO Patrick Byrne. Recently, Overstock.com was forced to eat crow by admitting to GAAP violations exposed in my blog and reported to the Securities and Exchange Commission. The company was forced to restate its financial reports for the third time in three years to correct those GAAP violations and is currently under SEC investigation as a direct result of reporting in my blog.

To borrow a quote from my dear friend Barry Minkow, similar efforts by other companies like Overstock.com and now Medifast to try to intimidate and silence their critics have been "tried and tossed."

Respectfully,

Sam E. Antar

Update:

Gary Weiss - Medifast, Meet Barbra Streisand

...I have no opinion on Medifast except that a suit like this is just plain stupid. All it is going to accomplish is to disseminate Minkow's claims to people like myself who don't follow such things and ordinarily couldn't care less.

Update - The Defendants Respond:

Fraud Discovery Press Release

The Fraud Discovery Institute, Inc. announced today in a response to a lawsuit filed recently inSan Diego federal court by Medifast, Inc (NYSE:MED) on Wednesday, February 17th, 2010 thatthe company is reopening their investigation of Medifast, Inc and will zealously continue torelease accurate and truthful information about the company. “This is a case study in a muchbigger picture,” said Barry Minkow, Co-Founder of the Fraud Discovery Institute, Inc.“The conspiratorial approach utilized by public companies like Medifast, Inc. needs to be seenfor what it is—an all-out attack using threat and intimidation designed solely to silence anyonefrom speaking critically about their business model, their compensation plan or their alleged misrepresentations.”

Tracy Coenen: Medifast files lawsuit, Fraud Discovery reopens investigation

The complaint filed by Medifast contains pages of self-praise, along with attacks on the character of those involved in the investigation of the company. In one example of the attacks, Medifast falsely refers to multi-level marketing expert Robert FitzPatrick as “… a self-claimed expert in pyramid schemes.” A brief look at FitzPatrick’s work clearly shows he’s not a “self-claimed” expert on pyramid schemes. In fact, regulators around the world have utilized his expertise. The Federal Trade Commission has received training from him. FitzPatrick has also testified in state and federal courts as an expert witness on pyramid schemes.

William Lobdell: Fraud Discovery Responds to Medifast Lawsuit; promises not to back down reporting the truth

Note:

At the original time of this blog post, Minkow and the other defendants had not yet publicly responded to this lawsuit. I've updated this open memo to include their responses and other links.

Additional information:

Open Memo to Medifast Chief Executive and CFO Michael S. McDevitt: Cut the BS and Address Troubling Issues Raised by Barry Minkow

Disclosure:

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 Overstock.com securities short or long. My research on Overstock.com 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 Overstock.com's financial reporting is a forensic accountant's wet dream and Patrick Byrne is about to become the SEC's new orgasm.

I do not own Usana securities short or long.

A few years ago, I helped fund Fraud Discovery Institute's investigations, including Usana.