Massachusetts Senator Edward Markey is asking for more information about the
business practices of Herbalife Ltd, his office say, making him the most
prominent lawmaker to call for an investigation into claims the nutrition
company is running a pyramid scheme.
Herbalife shares tumbled more than 12% after Markey, a Democrat, said he had
written to the US Securities and Exchange Commission (SEC), the Federal Trade
Commission (FTC) and to Herbalife itself to try to obtain more information.
"There is nothing nutritional about possible pyramid schemes that
promise financial benefit but result in economic ruin for vulnerable
families," Markey, a member of the Commerce, Science and Transportation
Committee, said in a press release. He said the call for a probe followed "serious
complaints of improper pressure and financial hardship" from constituents.
Herbalife spokeswoman Barbara Henderson said the company had received the
letter and looks "forward to an opportunity to introduce the company to
him and address his concerns at his earliest convenience."
Stock price drop
The battle for the future of Herbalife has been raging for over a year after
prominent activist investor William Ackman accused the company of running a
pyramid scheme – an unsustainable business model that focuses more on recruiting
salespeople than on selling.
Herbalife has vehemently denied the accusations.
Since then, major investors including Carl Icahn have lined up against
Ackman's $1 billion short bet, making Herbalife shares some of the most closely
watched on Wall Street.
The stock price surged 139% in 2013, but has fallen 16.6% so far this year.
S&P Capital IQ analyst Tom Graves lowered the company's 12-month target
price to "to reflect our view of increased risk,
after US Senator Edward Markey sought an SEC and FTC investigation."
Ackman and Icahn were not available for comment.
Markey wrote in the letters that his interest in Herbalife was sparked by
constituents in Massachusetts who claim to have lost thousands of dollars
buying supplies that they could not sell on to customers. He said one family in
Norton said it lost its entire retirement
account, from investing with the company.
Another woman said she was pressured to recruit family members and spend
more money to buy more products so that she could qualify as a
"supervisor" in the Herbalife system, according to the press release.
Markey's staffers met with Ackman in Washington a few months ago, but the
Senator has not met the hedge fund manager personally, a spokeswoman said.
"Herbalife may be a purveyor of health and wellness products, but some
of its distributors are suffering serious economic ill-health as a result of
their involvement in the company. I have serious questions about the business
practices of Herbalife and their impact on my constituents, and I look forward
to receiving responses to my inquiries," he said in the press release.
Probing marketing practices
Markey asked that the SEC, FTC and Herbalife respond to his staff by
In Markey's letter to SEC Chair Mary Jo White he said he wanted regulators
to "confirm that the company is acting in accordance with the federal
securities laws under the authority of the Commission."
Markey has also asked Herbalife to say whether or not it is targeting
minority communities, another big complaint about how the company operates.
In October Latino civil rights activists asked California's attorney general
to probe the company's marketing practices and on Friday the League of United
Latin American Citizens will be meeting with members of the attorney general's
office to lay out their case in person, Brent Wilkes, the group's national
executive director said.