Federal Trade Commission to Investigate Herbalife
Stock trading briefly halted on news of Herbalife probe.
March 12, 2014 — -- The Federal Trade Commission today confirmed it is investigating the California-based diet-shake company Herbalife, an announcement that has come as Hispanic groups have raised questions about the company’s multi-level marketing program.
“Herbalife welcomes the inquiry given the tremendous amount of misinformation in the marketplace, and will cooperate fully with the FTC,” the company said in a statement released Wednesday. “We are confident that Herbalife is in compliance with all applicable laws and regulations.”
The announcement forced a brief halt in trading of Herbalife stock on Wall Street. Stock then dipped 13 percent on the news.
The company has been the target of year-long short-sale campaign by the hedge fund Pershing Square, which gambled $1 billion on the prospect that the publicly-traded company would fail. Pershing Square made that “short” investment arguing that regulators would determine that the company was operating as an illegal pyramid scheme -- a claim the company has long refuted.
Until today, no regulatory agencies had said publicly if they would be undertaking an investigation into the claims against the company. On Jan. 23, Sen. Edward J. Markey, D-Mass., wrote to the Federal Trade Commission to ask that the agency “look into the business practices at Herbalife.”
James Angel, a Georgetown Business professor, told ABC News that in recent months, the market has fluctuated wildly on news about the company because there remains real uncertainty about which side is right – the company and its backers, or Pershing Square.
“There really is a mystery about this company,” Angel said. “And that's what makes is so fascinating. Where you see the titans of Wall Street fighting it out over this mysterious company.”
Pershing Square has been using lobbyists and public relations firms to try and prompt an investigation into the company’s practices. One line of attack has come from Latino organizations, some of which have received donations from Pershing Square. One of the nation’s largest Hispanic civil rights groups spent the past several months lobbying members of Congress for help in persuading federal regulators to investigate the California-based diet shake company, which has recruited hundreds of thousands of Latino-Americans as distributors to sell its products.
“It’s a serious problem for our community,” said Brent Wilkes, national executive director of the League of United Latin American Citizens (LULAC).
Wilkes confirmed this week that his organization had received, but later returned, a $10,000 donation from the Pershing Square hedge fund.
READ: Latino Group Demands Herbalife Probe
Prior to today’s FTC developments, Herbalife President Des Walsh told ABC News that Wilkes’s views about the company are “mistaken” and have been based on misinformation.
“We're distressed to hear it, because frankly, we know the good that we do every day,” Walsh said. “We know the fact that every single day, our Latino distributors are hard at work in the Latino community, bringing good nutrition and bringing financial empowerment. And so we believe that, frankly, Mr. Wilkes is mistaken in his views. And we look forward to the opportunity to really have him take the time to come to know Herbalife.”
“Just in one year alone, in terms of payments that we made to Latino distributors in the U.S., we made payments in excess of $180 million into the Latino community,” Walsh said. “So we believe that we are a major contributor, not just to the health of Latino communities, but in addition to the financial wellbeing of nutrition communities.”
Herbalife is a 34-year old multi-level marketing company that sells diet shakes, nutritional supplements and cosmetics through an army of more than three million distributors, now called members. Some consumers sign up as members of the company in order to receive a discount on the products, while others are interested in becoming distributors who hope to profit through the sale of the product to others.
Walsh told ABC News that, contrary to impressions of the company formed during its early years, it is not a get rich quick scheme. He said fewer than four percent of people who come to Herbalife are seeking a full-time business opportunity.
Numbers disclosed by the company show roughly one-quarter of one percent of total members make $50,000 or more through the people they recruit.
“Many people who come to Herbalife, they come to it just as they do whether it's Avon or Amway or Mary Kay, because it's a low cost of entry,” Walsh said. “And once they've once they've earned some additional income, whether it be for seasonal purposes or Christmas or whether it's for a special occasion, then these people will come and go. That's the wonderful thing about the direct selling business. It's a low cost of entry. It's easy in. It's easy out.”
In the statement released Wednesday, Herbalife said the company would weather the federal examination. “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,” it said.