Herbalife Ltd. (NYSE:HLF) is now the focus of an official official investigation. This time, it’s regulators in Canada who are probing the nutritional supplements company which activist investor Bill Ackman has decried as an alleged pyramid scheme since December 2012.
Shares of Herbalife Ltd. (NYSE:HLF) declined as much as 4% after Michelle Celarier’s article in the New York Post was published.
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Canada launches official investigation into Herbalife
In the U.S., there has been plenty of talk about whether regulators should investigate Herbalife Ltd (NYSE:HLF). Various organizations and some lawmakers—including U.S. Sen. Ed Markey—have called for an investigation into whether the company is a pyramid scheme. Even in China, the media probed Herbalife last year. But all of this has been just talk with no official action—until now.
Now the Canadian Competition Bureau, which is the top consumer regulator in Canada, is said to be looking into whether Herbalife Ltd (NYSE:HLF) is a pyramid scheme. The Post cites sources who said the regulator received complaints from consumers about Herbalife. The regulator also reportedly spoke with former insiders of Herbalife, as well as distributors who believe it is a pyramid scheme.
The Canadian agency looking into Herbalife Ltd. (NYSE:HLF) is very similar to the U.S. Federal Trade Commission, although it differs in the fact that it is able to bring charges against companies.
Consumers complain about Herbalife distributors
In addition to receiving official complaints about Herbalife Ltd (NYSE:HLF), the Post said “an unknown number of Canadians” have also contacted the agency to complain about several of its distributors. Specifically, they were said to have alleged that distributors made false claims about income and were guilty of other activities which typically go on within pyramid schemes.
The complaints are said to be focused on former Herbalife Ltd (NYSE:HLF) distributor Shawn Dahl and also Online Business Systems, an Internet recruiting system which is run by Dahl. The focus of that system is to sign up people as distributors of Herbalife products. It claims to provide leads for Herbalife distributors. However, it is unclear whether Dahl and his company are also the focus of the regulatory investigation.
Connections drawn within Herbalife operations
Online Business Systems apparently replaced another company called Global Online Systems, which closed a decade ago after being convicted of going against the Canadian Competition Act. That act governs multi-level marketing practices. The directors of Global Online Systems and its distributors were ordered to pay a fine of $150,000 and barred from taking part in future pyramid activities.
Interestingly enough, two relatives of Dahl’s wife were connected with the old company. Documents reportedly showed that Deborah Stoltz, Dahl’s mother-in-law, remained a distributor of Herbalife Ltd (NYSE:HLF) products as recently as last year and retained a title reserved only for the company’s top sellers as a member of the President’s Club. She also may have helped transition Global Online Systems into the new company.
A source speculated to the Post that the investigation could be in connection with the prohibition order against those connected with Global Online Systems. However, the source also indicated that the probe was broader than that.
After years of praising the Dahl family for their contributions, Herbalife Ltd. (NYSE:HLF) severed its connections with both the Dahls and Online Business Systems after Bill Ackman focused the light on lead generation systems like the one operated by them. Distributors reportedly told the Post last year that the so-called leads provided by the systems weren’t worth anything.