Herbalife Ltd (NYSE:HLF), the nutritional supplements company which leapt into the public eye thanks to a loudly announced short by Bill Ackman, is now at the center of scrutiny regarding the safety of its products. That’s according to William Alden and Andrew Ross Sorkin of the New York Times’ DealBook. They say a former employee of Herbalife has received a subpoena to produce documents related to the company’s safety issues in 2011.
Herbalife executives were concerned
The company halted production at its factory in early 2011 after detecting very fine metal shards in its Formula 1 shake powder. In about five weeks, Herbalife Ltd (NYSE:HLF) had apparently fixed the problem and encountered a second problem with metal contamination. Executives say no contaminated products were ever shipped to consumers, but some of them expressed big concerns about the way the company ran its factory.
Specifically, Gary Swanson, senior global quality vice president, said in February 2011 that he got “a very sick feeling” in his stock when he was thinking about it. He also said at that time that if Herbalife was audited by the Food and Drug Administration within 30 days of his comments, it would be in big trouble.
Herbalife employee wants whistleblower status
The former Herbalife Ltd (NYSE:HLF) employee who has been subpoenaed by officials is being required to provide internal emails, slide presentations and operational reports, according to sources cited by DealBook. The person’s name is not being released because of concerns about legal repercussions, but he or she collected the documents before leaving the company in 2011.
That former employee is now trying to get the Securities and Exchange Commission to grant them whistleblower status. The person approached the FDA last year but then reportedly went to Bill Ackman, who agreed to pay the legal fees. Ackman and others have been trying to get U.S. agencies to investigate Herbalife, alleging that it’s nothing but a pyramid scheme which preys on low income people.
Questions raised about Herbalife’s practices
What may be seen as the biggest problem for Herbalife Ltd (NYSE:HLF) is the fact that the product that was suspected to be contaminated was not destroyed. Product safety experts prefer it to be destroyed. Instead, Herbalife quarantined it and then tried to salvage it by inspecting it more closely to look for metal shards. The company claims that only the product which passed those additional inspections was released.
Technically there is no law requiring companies to destroy product that may be contaminated, and the company was not required to contact the FDA if it believed that it was able to keep the contaminated products off the market.
Herbalife reviews mixed
And as if security concerns weren’t the only problem, it seems as if there may be a reason few people heard of Herbalife before Bill Ackman shorted the company. Business Insider’s Julia La Roche and William Wei mixed up some Herbalife shakes and served them to some of their workers. The looks on some of their faces were priceless. Most of them thought those shakes were pretty gross, although a few said it wasn’t too bad. Some compared it to drinking oatmeal or eating a whole box of cake batter.