24 January 2014

Herbalife may be a pyramid scheme

A US senator is asking for more information about the business practices of Herbalife, following on claims that the nutrition company is running a pyramid scheme.

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.

Economic ill-health

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 February 28.

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.


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