A U.S. District Court judge has denied a motion by Nu Skin International Inc. to dismiss a lawsuit by a former Canadian distributor who says the personal-products company violates federal securities laws by operating a pyramid scheme.
In a second attempt to obtain a dismissal, Nu Skin lawyers argued the company's direct sales to distributors do not constitute securities transactions.But in a 32-page decision, federal Judge David Sam sided with Natalie Capone, Toronto, and her lawyers, saying the Provo-based multilevel marketer failed to establish that the company's "distributorships" are not securities under federal law.
In her 1993 suit, Capone says she lost $5,000 to Nu Skin and asked that her suit be considered a class action suit on behalf of some 50,000 Canadian Nu Skin investors who allegedly lost more than $25 million in the lotions, gels, hair and nail care products company since Jan. 1, 1990.
In addition to Nu Skin International and Nu Skin Canada Inc., Capone names as defendants Nu Skin President Blake Roney and top-level, "Blue Diamond Council" Nu Skin distributors Clara McDermott and Richard Kall.
Capone argues in her suit that Nu Skin is a "classic pyramid scheme" because participants pay money for the right to sell products, receive rewards for recruiting other participants and earn commissions when those recruits bring others into the company.
Ray Beckham, Nu Skin's managing director for corporate communications, said such allegations have been made and disproved before.
"We've been looked at by attorneys general in several states and found to be operating legal and above-board," he said.
But, Sam wrote, "it appears to the court that, in marketing this program, defendants place great emphasis on distributors duplicating themselves, receiving commissions from the sales of others, making big money from building a sales force, becoming financially independent and the like."
Sam also struck down Nu Skin's claim that Capone filed her suit after the one-year period allowed by the statue of limitations.
Capone, who was a distributor for 16 months, made the original purchase of the alleged security in November 1990. She terminated her distributorship in April 1992 and filed her suit in March 1993.
Sam ruled that "at least a small portion of (her) investment could be viewed as falling within the statue of limitations."