Letter from Pyramid Scheme Alert to Chairman of FTC
FTC INVESTIGATION REQUESTED OF USANA HEALTH SCIENCES

May 4, 2007

Deborah Platt Majoras
Chairman
US Federal Trade Commission
600 Pennsylvania Avenue, N.W.
Washington, D.C. 20580

Dear Commissioner Majoras:

We respectfully request that the Federal Trade Commission immediately open an investigation of the company, Usana Health Services, based in Salt Lake City, Utah. Publicized evidence indicates that this company is marketing a “business opportunity” in which tens of thousands of US consumers are lured each year to invest thousands of dollars and countless hours and effort in a business opportunity based upon the fraudulent trick of “endless chain” recruiting.

The Securities & Exchange Commission has already opened an informal inquiry into the company following revelations in The Wall Street Journal .

According to The Wall Street Journal, each year more than 92% of all “active” Usana participants do not earn a profit in Usana. (Many more lose money that are not officially counted by Usana as “active”. Their exact number and the full scale of losses are not disclosed by Usana). The great majority quit the scheme within a year after suffering losses. The mission of the Usana scheme is to replace these consumers with other victims, using the same lures and promises based upon the consumers’ making financial investments and engaging in pyramid recruiting.

Our organization, Pyramid Scheme Alert, a non-profit, non-partisan consumer education group, has received inquiries and complaints from consumers about the marketing and business practices of Usana.

The Wall Street Journal staff applied Usana’s sales and financial data in a test used by the Federal Trade Commission in previous prosecutions to determine if a multi-level marketing company is a direct selling company or a pyramid scheme. It found that 63% of all Usana sales to distributors would need to be retailed to consumers for Usana to pass the test of legality. Currently only 14% of reported sales are made on a retail basis. All other sales go only to distributors. Few are ever retailed.

A recent report by the well respected investigation company, Fraud Discovery Institute, revealed – and The Wall Street Journal fact-checked and reported – that products of Usana Health Sciences are priced extraordinarily higher than comparable products, (e.g. Usana's price for its vitamins is more than 20 times that of mass-market brands like Wyeth's Centrum).

Additionally, upon signing up, Usana induces consumers to increase their initial investment with the purchase of “business centers”. These “centers” are not locations and have no intrinsic value. They serve no other business purpose than to increase initial investment and to offer higher rewards based on recruiting other investors.

The combination of the practices of (1) inducing high up front investments with (2) promises of higher return from endless chain recruiting, (3) inflated pricing and (4) the lack of retail sales indicate that Usana operates as a chain letter or pyramid scheme, according to FTC guidelines, advisories and past prosecutions.

The initial investment in “business centers” and monthly quotas of purchases serve as the “consideration” to join and participate in the network. “Endless chain” rewards are offered to induce ongoing purchases and recruiting activity. Payments are directly tied to recruitment of new investors who sign up with the same proposition offered. This is the classic pattern of companies such as Equinox International and others that the FTC has prosecuted for unfair and deceptive trade practices.

They also reveal practices that the FTC warns consumers about on its official website. As an example, we refer to The Statement on Pyramid Schemes Delivered by the FTC’s General Counsel at the International Monetary Fund's Seminar On Current Legal Issues Affecting Central Banks at (http://www.ftc.gov/speeches/other/dvimf16.shtm)

“There are two tell-tale signs that a product is simply being used to disguise a pyramid scheme: inventory loading and a lack of retail sales. Inventory loading occurs when a company's incentive program forces recruits to buy more products than they could ever sell, often at inflated prices. If this occurs throughout the company's distribution system, the people at the top of the pyramid reap substantial profits, even though little or no product moves to market. The people at the bottom make excessive payments for inventory that simply accumulates in their basements. A lack of retail sales is also a red flag that a pyramid exists. Many pyramid schemes will claim that their product is selling like hot cakes. However, on closer examination, the sales occur only between people inside the pyramid structure or to new recruits joining the structure, not to consumers out in the general public.”

We will appreciate a reply. Thank you for your consideration and your service.

Sincerely,

Robert L. FitzPatrick

cc: Pamela Jones, FTC Commissioner
Jon Leibowitz, FTC Commissioner
William E. Kovacic, FTC Commissioner
J. Thomas Rosch, FTC Commissioner
Lydia Parnes, Director, FTC Consumer Protection Div.
Lois Greisman, Director, FTC Div. of Marketing Practices
James Kohm, Director, FTC Div. of Enforcement