Why Medifast Should Replace Its Auditors

Convicted felon turned fraud fighter Barry Minkow, co-founder of Fraud Discovery Institute or FDI, issued a report citing potential independence and conflict of issue problems between Medifast Inc. (NYSE: MED) and their auditors, Bagell, Josephs, Levine & Company L.L.C. In addition, a recent Public Company Accounting Oversight Board (PCAOB) inspection report raises serious questions about the quality of audits conducted by Bagell, Josephs, Levine.

See excerpt from FDI press release (.pdf) below:

According to the letter (.pdf) by securities expert Michael Brown and other evidence just released on a web site specifically dedicated to the Fraud Discovery Institute’s almost year-long investigation of Medifast, Inc, Medifast’s outside accountants, Bagell, Josephs & Levine & Company, LLC, have over the past three years, also operated BJL Wealth Management, LLC at the same address of the audit firm and have many of the same partners in both firms.

The investigation revealed that BJL Wealth Management, LLC recommended the purchase of Medifast stock to an operative of the Fraud Discovery Institute, Inc, which appears to cross the line of independence according to Mr. Brown, who asserts that “If such conduct is indeed occurring, then it would appear that BJL's independence as MED's outside auditor has been compromised.”

Blog Note: Other background information on Bagell, Josephs, Levine & Company, LLC and BJL Wealth Management, LLC provided by Fraud Discovery Institute here (.pdf) and here (.pdf).

Minkow noted that a PCAOB inspection (.pdf) of six audits by Bagell, Josephs, Levine & Company L.L.C. identified significant audit deficiencies in three of those audits, or a whopping 50% of the audits sampled. According to the PCAOB report:

The deficiencies identified in three of the audits reviewed included deficiencies of such significance that it appeared to the inspection team that the Firm did not obtain sufficient competent evidential matter to support its opinion on the issuer's financial statements.

Unfortunately, the PCAOB does not disclose which company audits were improperly conducted.

As of June 19, 2008, according to the PCAOB inspection report, Bagell, Josephs, Levine had only sixty audit clients. I found that at least five companies have dismissed Bagell, Josephs, Levine as their auditors since the PCAOB inspection report, a large number considering that they had only sixty audit clients:

July 23, 2008: City Loan Inc., February 2, 2009: Global Resource Corporation, March 10, 2009: Thomas Pharmaceuticals Ltd, March 24, 2009: Champions Biotechnology, and May 4, 2009: DK Investors Inc.

If Medifast's Audit Committee is serious about the quality of its auditors, they should consider hiring a new firm.

Disclosure: While I do not own any position in Medifast securities long or short, I assisted FDI in researching certain information relating to Medifast. I am a convicted felon and a former CPA. As the CFO of Crazy Eddie, I helped mastermind one of the largest securities frauds committed during the 1980s. I pleaded guilty to three felonies.

Barry Minkow frequently owns a short position in public companies that FDI investigates. Minkow and I are close friends.

Comments

[civilserving:]

Medifast (NYSE – MED) downgraded due to insider trades, poor Auditor transparency/conflicts and potential risk that their recent Revenue reporting may be revised down. .This is going to get much worse before it gets better –going down to $5.00

So the Chairman’s household sold a cool Million dollars worth of the stock in the last round – Each share sold under the knowledge of an investigation into MED and its revenue recognition categories.
“Brad” has been out posting again, a disclosure and dissemination of inside information in violation of SEC rules prohibiting such “insider” communications. (Whole Foods CEO ring a bell?)
Minkow is not going away and appears to have made real headway with the Auditor conflict – (Selling shares or not – owning a brokerage house is the real conflict)
I am asking here – does anyone know of an auditor of publicly traded companies, who also owns a Brokerage company too? I can’t find one at all!
MED’s miraculous revenue increase last Q, - was mandatory to get MED off the NYSE’s dreaded “Watch List”. This revenue recognition was masterminded by the Chairman and the conflicted Auditor – it may have to be revised…. (What is the NYSE’s internal control doing about this too?)

Jun 10 02:14 PM

[The Bottom ...:]

Sam Antar invests his wifes money with Barry Minkow and has a HUGE conflict of interest in giving an unbiased opinion of Medifast and it's auditors. Why would Sam give his Ex-Con friend Barry Minkow $250,000 to invest, being that Barry Minkow is not a registered investment manager or has any such experience.

Fortune Magazine did a write up on Sam Antar on December 25, 2007. The Fortune article quoted the Utah attorney general Mark Shurtleff as saying this about Sam, "To a thief everyone looks like a thief." The article goes on to say this about Sam's investigations, " He hasn't brought any companies down or caused any regulators to open any investigations." In other words, the article questions Sam's integrity and motives in his "so called investigations."

Sam's good buddy Barry Minkow has gone after approximate 6 publicly traded companies for either being ponzi schemes or having toxins in their products. In all 6 cases, Minkow shorted and/or bought puts on all these stocks and profited ALL 6 times.
Doesn't that sound like a HUGE CONFLICT OF INTEREST!

In ALL 6 cases, Minkow never proved a thing, except that he knows how to make his investors like Sam a buck, by shorting the publicly traded companies stock, putting out a negative press release, watching the stocks tank and then cashing out shortly thereafter.

America's 4th largest home builder Lennar, is suing Minkow for Extortion, Fraud, Libel and other things. Minkow also calls them ponzi schemish.

Minkow claimed Herbalife and Usana had toxins in their products and put out press releases saying so. Again, before the press releases, he shorted the stocks and bought puts on both firms. Minkow made a nice financial killing for himself and his buddy Sam in the process. Months later, Minkow "retracted" his claims of toxins against both companies and then went away.

Minkow had 2 labs checks Medifast products and both labs came back with different results. The first lab report said on it's front page "Please destroy the original lab report sent to you." Interesting that both lab reports had different results and that the first report had to be revised. It's also interesting that the lab reports said that Medifast had arsenic and lead in their tested products. Being that Medifast has been in business 29 years, has had over 15,000 doctors recommending their products, has had over 1,000,000 customers and has a close association with John Hopkins that not 1 single customer has died from the so called arsenic. Being that Sam's partner Minkow "retracted" his Lab Reports on Herbalife and Usana, one has to question Minkow's and Sam's real motives in putting out press releases such as the one Sam put out regarding Medifasts auditors and the press release saying that Medifast puts arsenic in their products. Again, NOT ONE thing was ever proven in ANY of Minkow's investigations against any of the other publicly traded companies. The only thing Minkow proved was that he knew how to make a buck shorting these companies stocks, putting out bogus press releases and then retracting his claims.

Like the Fortune article said, "He (Sam) hasn't brought any companies down or caused any regulators to open any investigations." With all of Sam's conflict of interests and his Ex-Con past, it's no wonder that no one takes him seriously.




On Jun 10 02:14 PM civilserving wrote:

> Medifast (NYSE – MED) downgraded due to insider trades, poor Auditor
> transparency/conflicts and potential risk that their recent Revenue
> reporting may be revised down. .This is going to get much worse before
> it gets better –going down to $5.00
>
> So the Chairman’s household sold a cool Million dollars worth of
> the stock in the last round – Each share sold under the knowledge
> of an investigation into MED and its revenue recognition categories.
>
> “Brad” has been out posting again, a disclosure and dissemination
> of inside information in violation of SEC rules prohibiting such
> “insider” communications. (Whole Foods CEO ring a bell?)
> Minkow is not going away and appears to have made real headway with
> the Auditor conflict – (Selling shares or not – owning a brokerage
> house is the real conflict)
> I am asking here – does anyone know of an auditor of publicly traded
> companies, who also owns a Brokerage company too? I can’t find one
> at all!
> MED’s miraculous revenue increase last Q, - was mandatory to get
> MED off the NYSE’s dreaded “Watch List”. This revenue recognition
> was masterminded by the Chairman and the conflicted Auditor – it
> may have to be revised…. (What is the NYSE’s internal control doing
> about this too?)

Jun 23 12:32 AM