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Nu Skin Enterprises : Investors sue Nu Skin over China setback

03/21/2014 | 10:20am US/Eastern

A group of investors in Utah's Nu Skin Enterprises has launched a class action suit against the multilevel marketing provider of skin care products and dietary supplements, claiming the company concealed that its China operations were running afoul of the country's law.

The suit alleges the Provo-based company, which is heavily dependent on China for a significant amount of its growth and revenue, issued glowing statements on multiple occasions about its rising sales in Greater China, but hid its fraudulent sales practices and noncompliance with Chinese law.

The controversy was spawned earlier this month when China's People's Daily newspaper, which serves as a mouthpiece for the country's ruling Communist Party, published a report saying that Nu Skin is operating in violation of Chinese law and is suspected to be an illegal pyramid scheme. The paper further claimed that Nu Skin brainwashes its trainees and is selling 20 more products than allowed by the Chinese government. Following the report's publication, China's State Administration for Industry and Commerce announced an investigation into Nu Skin.

On the news of the Chinese probes, the share price of Nu Skin common stock plummeted more than 40 percent earlier in the month.

"Nu Skin painted a materially misleading picture with regard to its prospects because so much of its revenue was based on its sales and success in China, and Nu Skin's business there could not be sustained because it violated local law and regulations," the complaint says.

Also named in the lawsuit were Truman Hunt, president and CEO, and chief financial officer Rich Wood. "We believe the allegations are without merit and intend to defend ourselves vigorously," NuSkin said in a statement. In statements issued when the news broke about the People's Daily article, the company blasted the story, saying it contained inaccuracies and exaggerations that aren't representative of Nu Skin's business in China. Nu Skin has acknowledged that the investigation by Chinese regulators would likely have a negative impact on its revenue and said it had initiated a province-by-province review of its China operations.

The suit alleges two counts of violations of the Securities Exchange Act of 1934. The investors are seeking compensatory damages.

The NuSkin shareholders are represented by attorneys from the law firms of Barrack Rodos and Bacine of New York and Anderson & Karrenberg of Salt Lake City.

Nu Skin is a global direct selling company with operations in 53 markets worldwide. The company purports to develop and distribute premium quality anti-aging personal care products and nutritional supplements under its Nu Skin and Pharmanex brands.

(c) 2014 Enterprise Business Newspaper Inc.

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