Herbalife Ltd. (NYSE:HLF), a multilevel marketing company offering nutrition and weight loss management products, is facing another challenge related to its business model. This time, the company’s critic is not an entrepreneur or a hedge fund manager, but an advocacy organization.
Charges on Herbalife
MANA, a national Latina organization headed by Alma Morales Riojas sent a letter to Federal Trade Commission (FTC) chairperson Edith Ramirez requesting the agency to investigate Herbalife Ltd. (NYSE:HLF). Riojas claimed that the company conducted “deceptive business practices and abuses.”
According to Riojas, Herbalife Ltd. (NYSE:HLF) is very popular among the Latina community not just in the United States but also across Latin America. He emphasized that Latinas were encouraged to become distributors for the company because of an “exciting business opportunity” by promising “unattainable wealth and success.”
Riojas pointed out that the claim that Herbalife Ltd. (NYSE:HLF) is a product company and a business opportunity is deceptive, given the fact that the majority of its distributors make little or no income, based on the data released by the company that 88 percent of its participants did not receive any income last year.
Herbalife's profit generation
She emphasized that the company generates profits primarily from recruiting instead of selling its products. “On a personal level, I believe they prey on our most vulnerable, and I have seen some of my own friends in my home state of Texas fall victim to these terrible practices.”
She added that there had been troubling claims about Herbalife Ltd. (NYSE:HLF) and issues continue to emerge. Riojas urged the FTC to conduct a full investigation and examine the practices of the company immediately and thoroughly.
Last month, activist investor, Bill Ackman noted material progress on Herbalife Ltd. (NYSE:HLF) in his second quarter letter. According to him, he does not know whether the FTC conducted an investigation against the company.
However, he indicated that a number of developments should increase the possibility that the agency will look into Herbalife’s business practices. Ackman noted that Herbalife Ltd. (NYSE:HLF) modified its business methods and introduced two additional rules prohibiting distributors from purchasing business opportunity leads or product leads, and discouraging them from incurring debt or borrowing money to become distributors. According to him, these rule changes should raise red flags for policy makers.