The battle over
) business practices took a shocking twist as the company
revealed on Wed, Mar 12 that its operations will be investigated
by the U.S. Federal Trade Commission (FTC). Shares of the
nutrition supplement network marketing firm plunged 7.37% after
Herbalife has received a Civil Investigative Demand (CID) from
the FTC to investigate its operations. The company stated that it
will co-operate with the investigation as it is confident that
its operations comply with all applicable laws and
The news comes as a boost to activist investor William Bill
Ackman, hedge fund manager of Pershing Square, who has been
accusing Herbalife of running a pyramid scheme business model
over the past 14 months. The company was accused of making money
by recruiting new sales people and not from its sales. Ackman
made that claim in Dec 2012 when he unveiled a $1 billion short
position in the company's shares.
Recently, the billionaire investor also told his clients that
Herbalife is likely violating multi-level market restrictions in
China, per media reports. Ackman pointed to internal documents
obtained from a former employee at Herbalife and argued that the
company's Chinese operations were identical to its business in
other countries such as the United States and Mexico.
Herbalife responded to Ackman and stated that its business
model complied with Chinese direct-selling and anti-pyramid
regulations. Earlier in Jan 2014, First Financial Daily, a
Chinese newspaper, also suspected that Herbalife adopted illegal
marketing practices in China. Later in the same month, the
Canadian Competition Bureau announced a formal investigation into
the pyramid scheme business model complaints against the company,
as per a report by New York Post. In Dec 2013, Ackman even sent a
letter to its investors about the improper recruiting methods
adopted by Herbalife.
Given the recent development, it seems that Ackman's
persistent push for an investigation by state and federal
regulators has finally met with some success.
Herbalife, on its part, has been denying the charges since
2012. The company also came out clean in Dec 2013 when its
UK-based auditor PricewaterhouseCoopers (PwC) completed the
re-audit of more than three years of financial statements and
found no material changes in them. Moreover, despite allegations
and numerous attacks on its multi-level marketing model, the
company's earnings continue to increase.
Herbalife is not the only company, which employs sales
representatives to sell its products. Other multi-level marketing
Nu Skin Enterprises Inc
USANA Health Sciences Inc
Avon Products Inc
) also follow the same distribution model.
Herbalife holds a Zacks Rank #2 (Buy).
AVON PRODS INC (AVP): Free Stock Analysis
HERBALIFE LTD (HLF): Free Stock Analysis
NU SKIN ENTERP (NUS): Free Stock Analysis
USANA HLTH SCI (USNA): Free Stock Analysis
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