Slimming Down Medifast marketer plagued by suits, plunging sales

THE BALTIMORE SUN

Jason Pharmaceuticals Inc. grew fat when Oprah got thin, and thin when Oprah got fat again.

That much is agreed upon by everyone connected with the Owings Mills-based marketer of the Medifast diet plan. But the agreement ends there.

After rising to $51 million in annual sales during the late 1980s, the skyrocket that was Jason Pharmaceuticals landed last month in Baltimore's federal bankruptcy court, asking for protection from creditors while it reorganizes.

Members of Jason's founding Vitale family say the company can recover from the slump that hit the liquid-diet industry after television talk show host Oprah Winfrey regained the weight she had lost on a rival plan called Optifast. They say Jason, now slimmed down to 55 employees from more than 300 in its heyday, will develop new products to replace the 80 percent of sales lost since 1989.

But Jason's bankruptcy case is far from ordinary. Its Chapter 11 bankruptcy petition could prove a flimsy shield for a company enmeshed in a tangle of lawsuits.

Jason faces a $2.05 million damage claim from Patti Levitt, a former administrative assistant to the company's founder and chairman, Dr. William J. Vitale. The Pikesville woman charges in a Baltimore County Circuit Court suit that she lost her job after being caught between a boss who sexually harassed her and a jealous wife who defamed her and drove her out of the company.

Several dieters are suing, claiming that the Medifast program caused problems ranging from gallstones to gangrene. The company's fired former president, whom Dr. Vitale once hailed publicly as Jason's "Lee Iacocca," is suing for $500,000.

Jason's landlord has charged in court that the Vitale family drained more than $7 million from the company while its sales were sliding in recent years. Joel Sher, attorney for the creditors' committee, said Thursday that the group will join the landlord's motion to dismiss the bankruptcy filing as improper.

Meanwhile, former employees of Jason describe a company led by executives whose volatile tempers and erratic behavior left workers demoralized and confused -- a company where the owners insisted on extracting as much money in lean times as when sales were soaring.

The Vitale family is fighting all lawsuits. And they say the 'N allegations of erratic behavior come from disgruntled employees who were fired for good cause.

If Jason can get out of some ill-considered leases, as bankruptcy law permits, it will repay all valid claims, says James Vitale, chief executive and co-founder.

But Jason's adversaries doubt that the bankruptcy case will yield a routine corporate reorganization.

"Before it's all over, there could be fireworks," said Robert L. Hanley Jr., an attorney who represents a former landlord suing Jason.

Jason Pharmaceuticals was born in a kitchen blender, James Vitale recalls.

His father, a Baltimore dermatologist, had long been interested in the problem of obesity. In the mid-1970s, Dr. Vitale began to treat patients using the Optifast liquid-diet plan, but many other doctors had a hard time getting the product from Optifast, which imposed strict rules on participating doctors.

Sensing an opportunity, Dr. Vitale began developing a new liquid-diet formula in his kitchen. Into the blender went some dried milk, some egg white and various vitamins and nutritional supplements. The result, which Mr. Vitale describes as almost identical to Optifast, was dubbed Medifast.

Jason was founded in 1979. In the beginning, it was strictly a father-and-son act. James Vitale left the home-remodeling business and joined Dr. Vitale as a one-man production and marketing department.

Business took off when Jason ran an ad in a medical journal, James Vitale recalls. Sales grew from $250,000 the first year to $1 million the second and steadily up to $17 million.

"We could do nothing wrong," said Mr. Vitale, who recalls working "100 hours a week, minimum" during that period. He was joined in the business by his two sisters, Susan Vitale Boone, now vice chairman and chief counsel, and Barbara Vitale Forrester, who has left the payroll. The three share ownership of Jason, having bought out their father a few years ago.

Boom goes bust

Lightning struck in 1988. As the tabloids chronicled her every weigh-in, Ms. Winfrey lost more than 60 pounds on Optifast. The public reaction created a boom even for Optifast's competitors, and Jason's sales leaped to $51 million, a performance the company duplicated in 1989, Mr. Vitale says.

As the work force grew to 300, Jason executives laid plans for even greater growth. They moved into sparkling quarters in an Owings Mills industrial park, leasing spacious offices in three buildings.

An article about the company described the Vitales' trappings of newfound riches: Jim's speedboat, cabin cruiser and Jaguar XJS, Dr. Vitale's $715,000 Hunt Valley home and Piper Dakota. And it caught Jim boasting: "As most people know, some athletes make a few million bucks a year. My earnings are far in excess of that."

But no sooner did the article appear than the gravy train derailed. Not only did Ms. Winfrey regain her poundage, but Congress and the Federal Trade Commission also weighed in.

In a well-publicized 1990 hearing before a subcommittee of the ++ House Committee on Small Business, congressmen grilled diet industry executives about the safety risks effectiveness of their plans and about allegedly misleading advertising.

Dr. Vitale was sharply questioned by Chairman Ron Wyden, D-Ore., about Jason's system for certifying physician associates. turned out that the only required training was a "self-directed" course of study -- essentially a three-part manual doctors were supposed to read before administering the program.

In 1992, the Federal Trade Commission ruled that Medifast ads were "false and misleading," especially where they stated or implied that physician associates were certified in the treatment of obesity. Jason agreed to a cease-and-desist order that restricted the claims it could make in its advertising.

Meanwhile, the public began to learn about a rush of product-liability lawsuits brought by users of such "very low calorie diets." Most of them concerned the Nutri/System plan, which was sued by numerous patients who claimed they developed gallstones after rapid weight loss. The bad publicity spilled over to all weight-loss programs.

Since then, Jason, which told Congress in 1990 that it had ended its first decade with only one lawsuit filed against it and none settled, has become the target of least a half-dozen product-liability suits. The company is contesting each of the suits.

One of the most serious cases involves Eulas White, a 54-year-old Texas man who weighed about 370 pounds when he started the Medifast regimen in September 1989 at the urging of his physician. Mr. White, a diabetic, said his doctor took him off his diabetes medication when he began the program, under which he consumed 445 calories a day.

Without that medication, Mr. White said, he developed leg ulcers that led to gangrene. He said he was rushed to a Dallas hospital, where doctors amputated his right leg 5 inches below the knee. He is suing the doctor and Jason.

Turmoil at the top

As liquid-diet sales went into free fall weeks after Jason moved into its expensive new quarters, the Vitales scrambled to respond.

They tried sales promotions, but they didn't work. It introduced new diet products, including soups, oatmeal packets and salad dressings, but sales were disappointing.

"The doctors said they didn't want to be a grocery store," Jim Vitale says. And morale declined as the Vitales continued their conspicuous consumption -- even while laying off workers.

For example, Motor Vehicle Administration records show that within the last 12 months, Susan Boone and Jim Vitale received titles for three cars each, including a Ferrari for Mr. Vitale and two Mercedes and a Porsche for Ms. Boone. None was from the current model year, and Mr. Vitale says the Ferrari had been bought out of state earlier and retitled in Maryland last year. But that distinction was lost on employees.

Meanwhile, turmoil among top executives hurt the chances of a turnaround.

In May 1991, the Vitales hired Daniel Santangelo, who had headed Thompson Medical Co.'s Slim-Fast division, as chief executive officer for $200,000 a year. But 10 months later, Mr. Santangelo was gone, leaving in his wake a $500,000 lawsuit charging that Jason had fired him "without any cause whatsoever" and had refused to pay him for the remaining 14 months of his two-year employment contract.

What led to Mr. Santangelo's dismissal is a matter of dispute. Mr. Santangelo, through his attorney, declined to comment. The Vitales say simply that sales projections weren't met.

James Kemper Millard, who was vice president of marketing during Mr. Santangelo's tenure and was fired along with him, says his boss tried to lessen Jason's dependence on diet plans by making it a broad-based "nutrition company."

'Very disorganized'

Mr. Millard says the conflict at the top of the company became apparent when he attended a budget meeting with the Vitales. He says he learned that the family's cut was regarded as "untouchable," no matter how Jason performed.

Joel Echols, another former Jason executive, blames Mr. Santangelo for speeding the company's decline by imposing a $2,500 minimum on doctors' orders.

"It was a very disorganized situation, and Santangelo didn't understand the business and got mad and red in the face and screamed all day long," says Mr. Echols, who was fired by Mr. Santangelo. Mr. Echols describes his six-month tenure at Jason as "a nightmare" and its family owners as "truly bizarre."

Bizarre is an apt word for the behavior alleged in the lawsuit filed in August by Patti Levitt against Jason, Dr. Vitale and his wife, Maria Elisabeth Vitale. The suit, which is being contested by the company and the Vitales, charges that Mrs. Vitale developed an "unreasonable antipathy" toward Ms. Levitt after Dr. Vitale invited the administrative assistant to a "Christmas lunch."

According to the suit, that animosity reached a peak on Feb. 17, 1992.

The suit alleges that Dr. Vitale told Ms. Levitt his wife had left him, saying she would not come back until he fired the administrative assistant. That afternoon, Ms. Levitt alleges, Ms. Vitale sent a fax to the Jason offices accusing Ms. Levitt "of having a loathsome disease, and otherwise demeaning her."

That night, Ms. Levitt claims, she received two phone calls from Dr. Vitale, who made "explicit sexual comments and lewd suggestions" to her. On previous occasions, according to the suit, the doctor made "sexual physical contact" with Ms. Levitt in spite of her requests that he stop.

The Friday after the fax incident, Ms. Levitt was fired, according to the suit, which is pending.

Dr. Vitale declined to comment on that suit or other litigation.

'Pretty tough skin'

In a recent interview at Jason's Owings Mills headquarters, Jim Vitale and Susan Vitale Boone talked about Jason's past, present and future.

He is a stylishly dressed man who appears younger than his 38 years. She is a polished, soft-spoken 34-year-old lawyer. Both are slender and athletic-looking, walking advertisements for a weight-loss company.

They declined to answer some questions about pending litigation or deferred to two attorneys who were present.

Mr. Vitale says the company isn't holding its breath waiting for the liquid-diet market to revive. Jason has developed one or two "moderately successful" product lines other than Medifast, he says, including a less radically low-calorie diet program called Chiro-Trim, which is marketed through chiropractors.

Mr. Vitale and Ms. Boone say the company has paid its bills and that cash flow has never turned negative. And one of their attorneys denied the charges by Jason's landlord, Eight Crondall Associates L.P., which has alleged in court papers that during fiscal 1991 and 1992, while sales were plunging, Dr. Vitale and his three children received at least $7.3 million in salary and distributions. "No money was taken out inappropriately," said attorney Marc Lipchin.

For now, the Vitales are confident that Jason can come through the bankruptcy reorganization as a strong company, still under the control of its founding family.

"We have pretty tough skin," Ms. Boone says. "You've seen the sales in this business, and you get kind of tough after a while."

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