Herbalife Ltd. (HLF): How Many Lives Does It Have?

Herbalife Ltd. (HLF): How Many Lives Does It Have?

Herbalife Ltd. (NYSE:HLF) has dodged bullet after bullet. First Bill Ackman announced a massive short position in December 2012. Then he began to chip away at it, but to no avail, in spite of repeated calls for a regulatory investigation and his latest report, which takes aim at lead generation. Meanwhile other big name investors have dumped money into the company, effectively betting against Ackman and practically daring regulators to launch an official probe.

Play Quizzes 4

Is Herbalife a pyramid scheme?

At issue is whether Herbalife Ltd. (NYSE:HLF) is actually a pyramid scheme. Currently all many investors care about is whether the company is making money, and its financial statements show it is profitable. However, U.S. regulators define an illegal pyramid scheme as one which makes most of its money from distributors recruiting other distributors rather than selling products to third parties outside the company and its distributors.

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This question is pretty hard to tell from financial statements alone. Herbalife Ltd. (NYSE:HLF)’s new auditing firm PricewaterhouseCoopers said they didn’t find anything fishy in the company’s finances, but what regulators may be most concerned about is where the income comes from.

Herbalife: We’re not a pyramid scheme

Herbalife Ltd. (NYSE:HLF) continues to deny the allegations that it is a pyramid scheme. However, as more and more organizations and lawmakers call for a probe, it’s worth questioning just how long U.S. regulators will avoid investigating. The League of United Latin American Citizens (LULAC) is the latest organization to come forward and demand an investigation. Their demands came on the heels of a call from U.S. Sen. Ed Markey.

The reason they’re pushing for an investigation is because of signs that Herbalife Ltd. (NYSE:HLF) might be victimizing low income people. LULAC revealed that more than 60% of Herbalife distributors are Hispanic, and 88% of Hispanic distributors make nothing from their time as a distributor for the company. One former distributor told ValueWalk last week that Herbalife told him it would pay for him to recruit other distributors but that he never received a dime for any of the approximately 15 people he recruited.

LULAC also noted that Herbalife Ltd. (NYSE:HLF) itself admitted that 73% of its distributors don’t want to sell; they’re just consumers. The organization said they “find that fraudulent.”

Herbalife dodges bullets

Herbalife Ltd. (NYSE:HLF) may officially be in hot water in Canada where authorities are said to have begun an official investigation. That report hasn’t been confirmed by other sources, but if Canada really is investigating, then what will it take for the U.S. to follow?

And then there is China’s investigation into competitor Nu Skin Enterprises, Inc. (NYSE:NUS). The nation hasn’t begun to target Herbalife Ltd (NYSE:HLF) yet, but how many times can the company dodge a bullet? It would certainly seem as if Herbalife has multiple lives, but of course even if a U.S. investigation is announced, it doesn’t mean that regulators will find anything. There may be nothing to find, as it contends that it operates within the confines of the law.

Just last month, Herbalife Ltd. (NYSE:HLF) dodged yet another bullet as regulators announced charges against some of its competitors. The company’s stock hit a new high as investors seemed even surer that Herbalife was untouchable. The only question now is whether the company will remain so.

DISCLOSURE: I have no position in Herbalife Ltd (NYSE:HLF) or any other company mentioned.

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Michelle Jones is editor-in-chief for ValueWalk.com and has been with the site since 2012. Previously, she was a television news producer for eight years. She produced the morning news programs for the NBC affiliates in Evansville, Indiana and Huntsville, Alabama and spent a short time at the CBS affiliate in Huntsville. She has experience as a writer and public relations expert for a wide variety of businesses. Email her at Mjones@valuewalk.com.
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  1. Herbalife is a pyramid scheme. Also–up until the “heat” turned up, it was cover for the Herbalife version of “Amway tool scam” where the real scammy monies are generated by the [fake] “top distributors” selling “infoproducts” and seminars to [fake] teach others how to “replicate” the fake top distributors suckcess.

    Herbalife is going to keep succeeding at scamming until news articles like yours effectively grow a pair–do a bit more research and then go ahead and make that bold statement: Herbalife is a pyramid scheme.

    Be prepared for Herbalife’s defamation suit–if they think your article is actually hurting them in anyway, they *will* sue… Interesting that Herbalife hasn’t sued Ackman for defamation isn’t it? Hmm why is that do you wonder? No in his case, it’s not because he’s not hurting them (he is)– it’s because the scare tactic wouldn’t work on him. Instead, such a suit would eventually be Herbalife’s undoing. (Because it isn’t defamation if it’s actually true. And again–it is actually true. Herbalife is a f—— pyramid scheme of the highest order.)

    Furry cows moo and decompress.

  2. With direct marketing of a product not available in stores, there is nothing fraudulent about people joining just to be consumers. The shorts are making a huge amount of noise, with nothing substantial to go on. I think the end of the short trade is near, and that the hedge fund is close to covering the short shares, and hedging their puts to neutral. The short trade has lost a huge amount of money, because it was deeply flawed from the start, and that remains so.

  3. Once again, another that is purely opinion without the real information. It always amazes me how institutions allow people the ability to write articles without printing the underlying truth. Maybe the FTC seems like they are not doing nothing because they ALREADY KNOW nothing is warranted against the company. The FTC knows that Shane Dinneen’s research for Ackman was wrong. The FTC also knows this is why Ackman made his huge position. And in fact, Ackman now himself knows Shane’s research was faulty. This is why Ackman is now going after Herbalife Distributor’s actions because he knows Herbalife International Itself is within the legal confines of the law.

    Also, it is deplorable that you mention or allude to in one sentence that Herbalife is under investigation in Canada, and then say “if it’s true” in the next. If the author had done her research, she would know that if Herbalife is under investigation in Canada, Herbalife would know. The CBB works differently from it’s USA counterpart. Herbalife would be told they are under investigation and would be asked by the convening authority for all related documents. Therefore, Herbalife would have to have a press release stating they are being investigating herbalife.

    Lastly, the author’s title should be “Ackman, struggling to find more bullets to buy” rather than what it is. This title leads people to think that Herbalife must be doing something wrong. When it’s just the opposite. The only reason why Herbalife is being shot at is because Pershing Square’s Ackman made a billion dollar short bet on faulty analysis. And when a person has a billion dollars and a reputation on the line, they will do anything, including buying people, lying, etc, to make their thesis correct. And Ackman is doing all this to make himself correct. But the FTC is going by the law, and the law says Herbalife is correct. Therefore, this is why you see, in the middle of all these shots fired at Herbalife, the FTC is not moving

  4. Dan Loeb said “The FTC has NOT been asleep for 33 years – it’s preposterous.” Herbalife was vetted in 1985, 2008 by FTC resulting in a Clean Bill of Health. Recently was vetted by Belgian Court resulting in complete compliance with the law!
    Remember this worthless analysis by Pershing Square…
    Ackman’s website has a new PDF up, HLF comparison with Fortune Hi-Tech Marketing. “Side-By-Side: A Comparison of Fortune Hi -Tech Marketing and Herbalife March 14, 2013”
    can buy meetings, Senators letters and headlines, but he can’t change
    the fact that HLF is in compliance with existing laws & regulations.

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