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PDFEditor's Note: This report was originally published by the Fraud Discovery Institute, which can be accessed at www.frauddiscovery.net.
How long until Medifast receives similar law enforcement scrutiny for a business model built upon a pyramid scheme?
"Sixty-one percent of Medifast’s total revenue is derived from Take Shape for Life, the company’s multi-level marketing division,” says Barry Minkow, co-founder of FDI. “Since both Pre-Paid Legal and Medifast must rely heavily on their multilevel marketing pie-in-the-sky compensation structure in order to lure in new recruits, it is critical for Wall Street investors and analysts to factor in what legal issues Medifast might be facing. And these similarities are striking."
FDI’s latest report shows the examples of similarities between Pre-Paid Legal and Medifast:
1. Both Medifast and Pre-Paid Legal report dismally low earnings for the vast majority of “coaches” and “associates.” From July to December 2009, 53% of Medifast’s “active” health coaches made an average of $97 per month, and this “average” is inflated, as it conveniently excludes all coaches who made less than $25 per month. In 2009, Pre-Paid Legal reported that only 1.6% of vested sales associate personally sold more than 10 memberships. With annual commissions of $16 or $25 per sale of a family plan for associates selling fewer than 25 memberships, this means that 98.4% of vested associates make less than $250 per year.
2. Representatives of Medifast and Pre-Paid Legal are incentivized to recruit, rather than to sell the products. The representatives above the salesperson in both companies are collectively paid much more in commission on each sale than the associate who actually made the sale. It is nearly impossible to make a reasonable income simply selling the products or services of Medifast or Pre-Paid Legal, pushing the representatives to recruit new members in the hope of earning more.
3. Both Medifast and Pre-Paid Legal have 10 levels of commission payouts. For an individual sale, the person making the sale will receive a small commission, while nine other levels will receive commissions that, collectively, usually exceed the commission the actual salesperson received.
4. What’s to hide? Neither Medifast nor Pre-Paid Legal discloses company “churn rates.” While both companies report the number of “active” coaches or associates at the end of the year (and Pre-Paid Legal also reports the number of associates recruited during the year), they deliberately fail to disclose the total number of representatives at the end of the year or the number of people who have quit during the year. Failing to disclose these key figures effectively conceals the failure rate of the recruits.
5. What else is there to hide? Neither Medifast nor Pre-Paid Legal discloses the real average income for coaches or associates. Medifast appears to disclose average income, but excludes all coaches earning $25 or less in monthly commission from its calculations, effectively making the reported “average” a completely fictional number.
"Multi-level marketing is not direct selling,” Minko says. It “is nothing more than a money transfer game where the product or service is merely the excuse used to move the money from those at the bottom of the pyramid to the exclusive minority at the top of the pyramid.
A new article by iBusiness Reporting does not stop at these points of similarities, but also shows several differences. One key difference is the Medifast riches promised to recruits are said to be an “entrepreneur’s fantasy,” but the company’s income disclosures tell of a vastly different reality for coaches. Click here to read the entire story.
* Disclaimer: Barry Minkow, the founder of FDI, normally holds a position in securities covered by FDI websites. Neither Minkow nor FDA will report when a position is initiated or covered. Readers must reach their own investment decisions based on their judgments about the market. They are encouraged to independently corroborate FDI findings before making those decisions.
