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Multi-level marketing firm Herbalife Ltd. (NYSE:HLF), a global nutrition company selling weight management and personal care products across 83 countries to distributors and through them, has been questioned by the SEC on some of its practices relating to the disclosure of sales by distributors.

Ironically, a lot of these questions ring a bell from April when the company’s conference call on its first quarter results was dominated by renowned short seller David Einhorn, who then first raised substantially the same issues. It may be recalled that the stock tanked 20% as a fallout of the questions because the market assumed Einhorn would likely short the stock. The company stuck to its line that its business was basically sound and announced a buyback of its common stock.

Last month Herbalife announced another solid quarter that beat analysts’ estimates. Sales increased 23% and EPS was up 25%.

The correspondence between the SEC and Herbalife Ltd. (NYSE:HLF) has been displayed on the regulator’s website. It appears that the SEC was satisfied with the company’s responses and has closed its inquiries.

Specifically the SEC called into question these issues:

  • Why Herbalife had discontinued giving the breakdown of its sales via distributors and why the company does not appropriately disclose details of its “70 percent” rule
  • What was the 70 percent rule and why it should not be considered a part of the company’s core business model.

The company’s answers have been pretty much in line with what it told Einhorn, and following the correspondence, the SEC sent off a “completed review” letter.

This should ease investors’ worries, if any, of Herbalife Ltd. (NYSE:HLF) being some kind of a pyramid scheme. According to analyst Timothy Ramey, the correspondence may ultimately prove to be a healthy thing, though still worrisome for investors, and that in the future it could serve as a useful “Asked” and “Answered” model for understanding the business model of Herbalife.

However, the SEC is not always on top of fraud issues, as many recent cases demonstrate. Many other investors still think the company is a fraud, including Dialectic Capital