Nu Skin reaches $47 million agreement to settle pyramid scheme lawsuit

Nu Skin Enterprises Inc., the direct seller of skin care and nutritional products, reached an agreement to resolve a putative class-action lawsuit that alleged the company and its executives failed to disclose an unlawful pyramid scheme in China.

The settlement for US$47 million is subject to court approval, and is not expected to result in a net charge to Nu Skin’s income statement because the company anticipates its insurers will cover the payment, according to a Feb. 26 regulatory filing.

Under the settlement, the defendants have not admitted any wrongdoing, and “the parties have agreed to execute mutually agreeable releases," the regulatory filing noted. Federal judge Jill Parrish must grant final court approval to the settlement, which Nu Skin said it anticipated will occur in mid-2006.

Plaintiffs’ counsel had been seeking to certify the class before the parties reached an agreement.

The lawsuit, filed on Jan. 21, 2014 in Utah federal court against Nu Skin and its senior executives, alleged the company failed to disclose to investors that its Chinese subsidiary was violating multi-level marketing regulations and laws.

That was the same month two Chinese government agencies revealed they were investigating Nu Skin following a Chinese newspaper report that questioned the direct seller’s business practices. In the wake of the developments, Nu Skin’s shares plummeted more than 44 percent in two days of trading, according to the complaint, which alleged violations of federal securities law and cited earlier statements by executives including Nu Skin CEO Truman Hunt touting the business in China.

The lawsuit was filed on behalf of a class that publicly traded Nu Skin’s common stock during the period from May 4, 2011 through January 17, 2014. The latter date was the same day a second Chinese agency—the Ministry of Commerce—said it would probe the company, according to the lawsuit.

In March 2014, Provo, Utah-based Nu Skin revealed the Chinese government has fined it US$524,000 (RMB 3.26 million) for selling products that were not registered for the direct-selling channel. The company also said it was fined for making product claims that lacked adequate documentary support, and six employees were fined for unauthorized promotional activities.

The lawsuit is Freedman v. Nu Skin Enterprises et al, 2:14-cv-00033-JNP-BCW, U.S. District Court for the District of Utah, Central Division. Reuters first reported the settlement agreement last week.