31-07-2017, 07:47 PM
Very interesting document indeed – class action against Nu Skin (illegal MLM practices in China)
Much to learn from it………………….
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http://securities.stanford.edu/filings-d...V00033.pdf
I. NATURE OF THE ACTION
This is a federal securities class action on behalf of a class consisting of all persons other than Defendants and certain affiliated persons who purchased or otherwise acquired Nu Skin securities including options between May 4, 2011 and January 17, 2014, inclusive (the “Class Period”), seeking to recover damages caused by Defendants’ violations of the federal securities laws and to pursue remedies under the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder.
2. Nu Skin is a global multi-level marketing company that distributes personal skin care products and nutritional supplements in the Americas, Europe, and the Asia Pacific region. Multi-level marketing (“MLM”) is a marketing strategy often used by companies making sales directly to consumers where the salespersons are compensated not only for products they sell, but also for the sales of other salespersons whom they recruit.
3. Prior to the start of the Class Period, growth in Nu Skin’s business in some of its larger, more developed markets including Japan and the United States was on the decline.
4. To offset the slowdown in growth in Nu Skin’s major, more developed markets, Defendants orchestrated a plan to substantially expand Nu Skin’s presence in the People’s Republic of China (“PRC” or “Mainland China”). The decision to focus the Company’s resources on growing business in the PRC was made despite stringent regulations in China prohibiting the very type of multi-level marketing and multi-level compensation employed by Nu Skin in all of its other markets and despite the limited success Nu Skin had achieved in penetrating the Chinese market as a result of those stringent regulations.
5. In early 2011, Defendants took what was already a modest, but illegal multi-level marketing business model and multi-level compensation plan in Mainland China, and essentially put it on steroids, easing some of the restrictions they had put in place, rapidly recruiting new distributors who received inadequate, if any training, authorizing the rapid expansion of downlines, and permitting the direct sale of products outside Nu Skin’s brick and mortar stores that were not licensed for direct selling.
6. Defendants also encouraged Nu Skin’s existing sales distributors around the world, including its Chinese-speaking distributors in Hong Kong, Taiwan, and Southeast Asia, to recruit sales promoters and distributors in Mainland China in much the same way they recruited distributors around the rest of the world. This included signing up sales distributors in Mainland China, paying them strictly on commission, and requiring the new recruits to sell specified minimum monthly sales levels of Nu Skin products while promising to reward them handsomely not only for selling Nu Skin products but also for recruiting additional new sales distributors from whom they could share their sales commissions. Defendants masterminded this massive expansion in China knowing that Nu Skin’s form of multi-level compensation violated many of China’s regulations on direct selling and prohibitions on pyramid schemes.
7. During the Class Period, Defendants repeatedly and misleadingly misrepresented how Nu Skin was operating its business in the PRC in order to create the appearance that the Company’s growth in Mainland China was achieved in compliance with China’s laws and regulations. Defendants told investors that Nu Skin developed a “hybrid” system of marketing the Company’s products in the PRC, creating “teams” that marketed Nu Skin products and shared in commissions.
8. In reality, Nu Skin was operating the very same MLM system in Mainland China that it was operating everywhere else. Confidential witnesses, and internal documents used to train new employees confirm that Nu Skin was not complying with China’s direct selling and anti-pyramid selling regulations. In fact, quite the opposite - Defendants were permitting the establishment of downlines in China in direct violation of China’s rules prohibiting multi-level marketing. Moreover, Defendants knowingly failed to put in place a system of internal controls that would have ensured that new sales representatives and direct sellers were trained in a way that complied with Chinese law. The training that did exist was lax and inconsistent and not at all enforced – another violation of China’s regulations on direct selling.
9. Quarter after quarter, Defendants continuously touted astounding growth in Mainland China attributing it to enthusiasm for Nu Skin’s anti-aging products and general business momentum all the while failing to acknowledge how that growth was really achieved in China – through multi-level marketing, vast networks of downlines, and poorly trained sales representatives who sold products not authorized for direct sales in Mainland China.
10. Nu Skin sales materials shared with potential recruits in China in early 2013 detail Nu Skin’s strategy to encourage its direct sellers and sales representatives in China to create at least six “generations” or layers of recruits underneath them to maximize their compensation. In these documents, Nu Skin calls the downlines of its sales representatives - sales “teams” - and calls its multi-level compensation “team rewards” or “team awards” – in an attempt to skirt the Chinese regulations prohibiting multi-level compensation and MLM. However, there is a flat- out prohibition against multi-level compensation in China and Defendants knew their “team rewards” system and “payment by team” was in direct contravention of that prohibition.
11. Nu Skin became increasingly dependent on Mainland China for a disproportionate share of its gross revenues and all of its growth. In 2010, revenue from sales in Mainland China was $91.4 million or 6% of Nu Skin’s overall revenue. By the end of 2013, those numbers skyrocketed – to over $1 billion in revenue and 32% of the Company’s revenue – a growth rate for Mainland China of 292% (year-over-year).
12. As they were touting the Company’s performance and prospects in Mainland China, the Individual Defendants unloaded huge amounts of Nu Skin stock for proceeds of more than $40 million, at a time when they knew that the Company’s stock price was inflated by the
false statements they were making about the reasons for the Company’s extraordinary growth in China .
13. Defendants’ scheme began to unravel in August, 2012, when Citron Research, a short seller, published the results of its private investigation showing that Nu Skin’s operations in Mainland China were being conducted no differently than they were in the rest of the world, through a multi-level marketing, pyramid scheme. Nu Skin’s stock dropped on the day this report was issued. Defendants responded to the report almost immediately, denying Citron’s claims and continuing to misrepresent the nature of Nu Skin’s business in the PRC. Defendants successfully convinced analysts and investors following the Company that Citron’s report was not credible, and Nu Skin’s stock rebounded in response while investors remained deceived. For the next year and a half, Defendants continued to tout the Company’s growth in the PRC, which, they claimed, was achieved while operating in compliance with Chinese law.
14. Defendants’ scheme completely fell apart on January 15, 2014 when a leading Chinese newspaper reported that Nu Skin was operating an illegal pyramid scheme in China, and employing unlawful business practices in violation of PRC law. The next day, Nu Skin reported that its business practices were under investigation by Chinese authorities.
15. The full truth was finally revealed on Tuesday, January 21, 2014 when Nu Skin filed a Report on Form 8-K releasing a letter to its customers in China (in English and Chinese / Mandarin) admitting to violations of Mainland China’s regulations on direct selling.
16. Between January 15, 2014 and January 21, 2014, Nu Skin’s stock price plummeted over 43% - falling from a market close on January 14, 2014 of $136.47 per share to a market close on January 21, 2014 of $77.39 on unusually high volume during those four trading days.
17. Ultimately, Nu Skin was fined by one branch of the Chinese government, forced to retrain its sales representatives in China and required to shutter certain “working studios” improperly used by the Company’s sales representatives in China to recruit new distributors and direct sellers. Further, based upon information and belief, at least one investigation by
Chinese authorities regarding Nu Skin’s business is ongoing as of June 2014 .
18. Defendants’ actions have negatively affected and continue to negatively affect Nu Skin’s revenues and growth rate in Mainland China. During the Class Period, growth in Mainland China reached almost 300% year-over-year. Now the Company cannot even predict if and when its business in Mainland China, previously one of its largest markets, will recover.
19. As a result of Defendants’ wrongful acts and omissions, and the precipitous decline in the market value of the Company’s securities, Plaintiffs and other Class members have suffered significant losses.