Herbalife Ltd. (NYSE:HLF) shares fell as much as 12% in early trading today after U.S. Sen. Ed. Markey (D-Mass.) urged regulators to investigate the company as a possibly pyramid scheme. That’s according to a report from The Hill.
Markey hears from constituents about Herbalife
The first-term senator said his constituents told him that they lost their life savings because they invested in Herbalife Ltd. (NYSE:HLF). As a result, he asked the Securities and Exchange Commission and the Federal Trade Commission to look more closely at the business practices of the nutritional supplements company.
In a rare interview with Harvard Business School that was published online earlier this month, (it has since been taken down) value investor Seth Klarman spoke at length about his investment process, philosophy and the changes value investors have had to overcome during the past decade. Klarman’s hedge fund, the Boston-based Baupost has one of Read More
“There is nothing nutritional about possible pyramid schemes that promise financial benefit but result in economic ruin for vulnerable families,” said Sen. Markey in a statement to The Hill. “Herbalife may be a purveyor of health and wellness products, but some of its distributors are suffering serious economic ill-health as a result of their involvement in the company.”
Sen. Markey said his constituents felt like they were pushed to recruit their family members to become distributors and also buy Herbalife products themselves in order to move up within the company. Another told him that she was pushed to stay in the program even after she expressed her desire to leave.
The senator emphasized that he wasn’t trying to choose sides in the debate about Herbalife Ltd. (NYSE:HLF). He merely wanted regulators to take a closer look at the situation. In addition to calling for an investigation, he also wrote a letter to the company’s CEO and asked for a full explanation of their business practices, compensation system and structure.
Markey joins others in call for Herbalife probe
The controversy about Herbalife Ltd. (NYSE:HLF) started in December 2012 when activist investor Bill Ackman called the company a pyramid scheme and revealed that he was shorting it. Since then, a number of organizations and state and local lawmakers have also called for an investigation into the company’s business practices. However, now Sen. Markey’s call for an investigation has pulled Washington into the fray.
Meanwhile, Herbalife Ltd. (NYSE:HLF) continues to defend its business practices, calling itself a legitimate multi-level marketing company. Herbalife said distributors earn commissions on the products they sell in addition to making money from recruiting other distributors. Skeptics like Bill Ackman contend, however, that the company makes most of its money from recruiting distributors rather than actually selling products.