Herbalife to Face FTC Investigation - Analyst Blog

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The battle over Herbalife Ltd. 's ( HLF ) 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 the news.

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 regulations.

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 companies like Nu Skin Enterprises Inc ( NUS ), USANA Health Sciences Inc ( USNA ) and Avon Products Inc ( AVP ) also follow the same distribution model.

Herbalife holds a Zacks Rank #2 (Buy).



AVON PRODS INC (AVP): Free Stock Analysis Report

HERBALIFE LTD (HLF): Free Stock Analysis Report

NU SKIN ENTERP (NUS): Free Stock Analysis Report

USANA HLTH SCI (USNA): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: FTC , AVP , HLF , NUS , USNA

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