Medifast Shares Lost Value Due to Fraud Allegations (MED)

Medifast Inc’s, (NYSE: MED) stock has dropped to nearly a third of its value during January because of a fraud allegation against the company. Barry Minkow and his Fraud Discovery Institute have alleged that Medifast’s subsidiary “Take Shape for Life” was operating a “pyramid scheme.”

Pyramid schemes are fake businesses. You take money from people to market a product or service, but the product really does not exist. This is very similar to multi level marketing with the difference being that in the latter, commissions are obtained if the sales people in the chain actually sell the products or services. They don't get paid by simply adding people in this pyramid.

Such schemes are completely illegal in most countries like the U.S, U.K, France, Brazil, Germany, Canada, and many others. The most famous incident happened in 2003 when FTC uncovered an internet based pyramid scheme. Consumers registered and bought packets of internet services, For example, internet mail, and were promised a commission if this service was resold, and hence this way the company expected the pyramid to grow. However, the company did not disclose the location of the consumer’s money and it gave affiliates material that allowed them to scam others.

It is not exactly clear what kind of a "pyramid scheme" Medfast is being accused of perpetrating. However, Medifast had refuted these allegations and accused Minkow in turn of manipulating the company’s share price. The law firm Barrack, Rodos & Bacine will be making further investigation on the basis of Minkow’s report. Due to all this negative sentiment, Medifast lost 15% and was priced at $22.80.