It has been announced officially by a federal judge that the investor’s claims of securities fraud, cover-up and insider trading involving Nature’s Sunshine Products are legally sufficient, denying the company’s motion to dismiss the April 2006 class-action lawsuit.
The decision was laid down by U.S. District Judge Ted Stewart. This means that the case can now proceed to the discovery phase which would allow representatives for the plaintiffs to gather documents and conduct interviews to build their case. Stewart ruled against the Provo-based supplement maker on all but one issue, limiting the scope of claims to acts that occurred on or after March 15, 2005. Investors insisted the so-called scheme to deceive independent auditors about company financials dated back to April 23, 2002.
Steven Anreder, Nature’s Sunshine spokesman downplayed the ruling as routine and reiterated the company’s position.
"We disagree with the allegations in the complaint and we expect to successfully defend them on the merits," Anreder said.
Meanwhile, Phillip Kim, a New York City attorney representing the investors, agreed that it is standard procedure for defense attorneys to question the validity of legal claims and request a dismissal, and courts routinely reject those motions. Kim, however, stressed that Monday’s ruling is significant because the court determined the complaint met the heightened pleading requirements set forth in the Private Securities Litigation Reform Act of 1995.
The law requires that securities fraud claims must have sufficient facts to provide a reasonable belief that the allegations are true. In order to help build their case, NSP investors used correspondence from the audit firm KPMG, which resigned as the company’s independent auditor in April 2006 after the company refused to fire its CEO and remove a key board member despite evidence both men knew about likely illegal acts within the firm’s foreign operations and didn’t tell auditors.
The lawsuit includes letters made in March 2006 that tell of an internal investigation that showed CEO Douglas Faggioli knew about “an alleged fraud,” twice made “false misrepresentations” to the independent auditing firm about it, and “approved a payment in violation of the Foreign Corrupt Practice Act.”
Many of the investors who bought stock in Nature’s Sunshine based on financial reports, seized on the revelations and sued, claiming that officials misled them while selling off $2.9 million in their own stock before the share price dropped sharply.