Shares of Owings Mills-based Medifast Inc. recovered slightly yesterday after the weight-loss products company responded to what it called false claims in a report this week by the Fraud Discovery Institute and defended the business model of its direct-selling division.
Medifast shares closed at $5.20 a share, up 7 cents, after losing nearly 30 percent of their value Tuesday in the wake of the report by San Diego-based FDI. The report said Medifast's direct-selling Take Shape for Life division offers a "misleadingly promoted income scheme ... that requires paying fees and buying Take Shape for Life products."
Take Shape for Life clients purchase Medifast meals and are mentored by health coaches, according to Medifast officials.
The report said Medifast delegated recruitment of new clients to "coaches" and used the promise of outrageous returns to lure new recruits.
"The vast majority of all consumers that Medifast enrolls in its 'business opportunity' and who serve as the engines of its growth are doomed to fail," the report said.
Yesterday, in a conference call with investors, Medifast chief executive Michael S. McDevitt called the report false and misleading. He said commissions of its coaches in Take Shape for Life are based on product sales.
"Not only is this business model legitimate, it is powerful and rewarding, and offers an opportunity to coach to earn fair income for challenging work," McDevitt said.
Earlier in a news release, McDevitt said of FDI co-founder Barry Minkow: "We believe most everything he says to be false and made for his own personal gain."
Minkow could not be reached yesterday. His company's Web site says it investigates financial fraud. Minkow became a fraud investigator after being convicted of stock fraud and conspiracy. He served a seven-year prison sentence from January 1988 to April 1995.