Network marketing giant Herbalife has confirmed that is the subject of an investigation by the Federal Trade Commission. Trading in shares of the company were briefly halted on the New York Stock Exchange after the price plunged 12% in the minutes after the announcement became public in the early afternoon, Eastern time, on Wednesday.
Herbalife confirmed Wednesday that it has received a Civil Investigative Demand from FTC. The company responded with the following statement: “Herbalife welcomes the inquiry given the tremendous amount of misinformation in the marketplace, and will cooperate fully with the FTC. We are confident that Herbalife is in compliance with all applicable laws and regulations. Herbalife is a financially strong and successful company, having created meaningful value for shareholders, significant opportunities for distributors and positively impacted the lives and health of its consumers for over 34 years.”
The company said the statement would be its only comment on the matter until further developments in the probe.
Sally Greenberg, Executive Director, National Consumers League, welcomed the news noting that the NCL originally called for such action one year ago.
“We applaud the Federal Trade Commission for opening this important investigation,” said Greenberg. “In early 2013, NCL met with representatives of the Direct Selling Association, Herbalife and Pershing Square Capital Management to examine questions about the legality of Herbalife’s business model and whether consumers recruited to sell products for the company were victims of a pyramid scheme. Unfortunately, these meetings did not alleviate our concerns. Subsequently, NCL asked FTC Chairwoman Edith Ramirez in a letter dated March 12, 2013 to open an investigation to determine whether Herbalife is a legitimate multi-level marketing company, as the company claims, or an illegal pyramid scheme.”
“The beneficiaries of today’s action will be the millions of consumers who purchase and try to earn money selling Herbalife’s products. This is an important step and we commend the FTC for its action.”
Herbalife has been under pressure in the stock market since William Ackman, principal of the investment firm Pershing Square, took a $1 billion short position in the company’s stock in 2012 and then embarked on a unprecedented public campaign to shine a negative spotlight on the company’s business practices. The campaign has included attempts to bring political pressure to bear against the company and to enlist minority groups in an effort to label the company’s direct sales model as a pyramid scheme and exploitative of minority distributors.
In late January, Herbalife received a letter from Sen. Edward Markey, D-MA , requesting detailed information from the company on its compensation structure for distributors to help determine whether it is a pyramid scheme. Markey had requested a reply from the company by Feb. 28.
Ackman’s attack on Chinese business
Ackman’s latest salvo against the company came Tuesday, when he accused the company of breaking direct selling laws in China, according to Reuters news service. Herbalife’s sales in China rose more than 120% in the fourth quarter of 2013, making it the company’s fastest growing region. Experts quoted in the Reuters article said offical action against the company was unlikely, as the laws governing direct selling in China are unclear and unevenly enforced.
However, Chinese authorities did take action against Nu Skin, another huge US-based network marketing company with significant business in the country. The State Administration for Industry and Commerce ordered an investigation into Nu Skin in mid Januray after the state-run People's Daily published a story that likened Nu Skin's coaching methods for salespeople to "brain washing" and suggesting that it is a pyramid scheme.
While the Herbalife’s business model has come under criticism, that has not extended to the company’s products. Herbalife’s bread-and-butter are a line of meal replacement shakes along with aloe beverages. In addition, the company sells a wide variety of dietary supplements. In recent years the company has bolstered its scientific and regulatory staff with the addition of Vasilos Frankos, PhD, former director of dietary supplement programs at FDA, Andrew Shao, PhD, formerly of the Council for Responsible Nutrition and Stephen Dentali, PhD, formerly of the American Herbal Products Association.