In re Nu Skin Enterprises, Inc. Derivative Litigation

Court: United States District Court, District of Utah
Case Number: 2:14-cv-00107-DB
Judge: Hon. Dee Benson
Case Contacts: David Wales, Brett M. Middleton, Adam Hollander

BLB&G is co-lead counsel in the shareholder derivative action filed in the name and for the benefit of Nu Skin Enterprises, Inc. ("Nu Skin" or the "Company"), against Nu Skin's Board of Directors (the "Board") and certain executive officers of the Company (collectively, the "Defendants").

Nu Skin is an international distributor of anti-aging personal care and nutritional products.  The Company primarily sells its products through a “multi-level marketing” or “MLM” approach, whereby individual salespeople or “distributors” must purchase large quantities of Nu Skin’s products while they also recruit new, lower-level salespeople, to whom they sell the bulk of those products (and who in turn seek to further distribute the Company’s products and recruit additional sales representatives).  Until recently, Nu Skin’s largest and fasting growing market was in China, which accounted for more than 40% of its revenues in 2013.  Nu Skin’s dependence on the China markets for growth, however, was at odds with China’s blanket statutory prohibition on multi-level marketing activity.  Despite claiming to operate differently in China, Nu Skin failed to do so, exposing the Company to severe harm.

The Complaint describes that the Board received numerous warnings and “red flags” that Nu Skin was using an illegal multi-level marketing approach in China, including prior fines and regulatory actions by Chinese authorities, warnings from the Ministry of Commerce, detailed reports by market participants and numerous press reports.  The violations of law were so rampant that (i) Citron Research (“Citron”), a market commentator that investigated Nu Skin’s China operations in 2012, quickly developed powerful evidence and concluded that Nu Skin violated China’s anti-MLM laws; (ii) numerous Chinese media outlets independently concluded that Nu Skin violated China’s anti-MLM laws; (iii) Chinese government investigations quickly concluded that Nu Skin violated China’s anti-MLM laws – and took significant action against the Company; (iv) Plaintiffs’ counsel investigated and quickly concluded that Nu Skin violated China’s anti-MLM laws; (v) counsel for the plaintiffs in a securities fraud class action against Nu Skin investigated and quickly concluded that Nu Skin violated China’s anti-MLM laws; and (vi) when news reports and government investigations forced Defendants’ hand, Defendants conducted their own “internal investigation” and found Chinese law violations within days

In January 2014, the Chinese government launched investigations of Nu Skin, which quickly resulted in Nu Skin curtailing its business operations in China, and resulted in fines and the Government requiring Nu Skin to change the way it operates to comply with the anti-multi-level marketing laws of China.  As a result, the Company has suffered substantial harm, including its quarterly revenues dropping by more than $200 million dollars in the first quarter of 2014, and the loss of more than half of its 49,000 sales leaders in China.  The harm to the Company continues.

The Complaint alleges that the Board breached its fiduciary duties by overseeing Nu Skin’s operations built on an unlawful sales model, failing to exercise its duty of oversight, and also that four directors and one officer sold more than $34 million of Nu Skin stock while in possession of insider information. 

As the Complaint contains Company references to minutes of the board of directors Company which the Defendants have designated as confidential, the public version of the Complaint is redacted.

On July 25, 2014 Plaintiffs filed a consolidated complaint. Defendants filed their motion to dismiss the consolidated complaint on September 25, 2014 and Plaintiffs filed their opposition on November 24, 2014. On January 2, 2015 Defendants filed their reply brief in further support for their motion to dismiss.

Argument on Defendants’ motion to dismiss was held on July 17, 2015.  At that hearing, the Court entered a stay of the action, pending resolution of a securities action involving Nu Skin.