FTC Mulls Action Against Herbalife Ltd. (HLF)

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US Federal Trade Commission chair Edith Ramirez sent a letter to US Senator Edward Markey telling him that she is considering taking action against Herbalife Ltd. (NYSE:HLF), the multi-level marketing company that critics accuse of being a pyramid scheme.

“With respect to the allegations against Herbalife, Ltd., a number of statutory provisions and the Commission Rules of Practice prevent me from discussing what action, if any, the Commission may take in any particular situation,” Ramirez wrote, reports Svea Herbst-Bayliss for Reuters. “I can assure you, however, that the information you provided and the concerns you expressed are being carefully considered.”

Ramirez’s letter was a response to Markey’s request that she open an investigation into the company after hearing complaints from some of his constituents. Markey didn’t take a position on the matter but wanted information on the turnover rate among Herbalife’s lowest level distributors, accurate information on Herbalife’s sales to the general public, and what levels Ramirez considers to be acceptable for each.

Markey examines extent of Herbalife’s outside sales

“While multi-level marketing companies, such as Tupperware, typically use compensation schemes that are based on member’s product sales to the general public, a pyramid scheme typically uses a compensation system that is ‘based on the number of people you recruit and your sales to them’,” Markey wrote last month in a letter to the FTC and the Security Exchange Commission, quoting the FTC’s Bureau of Consumer Protection in the last line.

Herbalife Ltd. (NYSE:HLF) alternatively claimed that it either doesn’t keep track of internal versus external sales or that the vast majority of its sales are to the general population (sometimes claiming as much as 90%), but the fact that there are material differences between its different answers, as Markey cites in his original letter, is one of the red flags that caused him to get involved.

Herbalife criticism has been mounting all year

Following the letter, Ramirez held a meeting with the League of United Latino American Citizens (LULAC) to hear their concerns, and LULAC claims that attorneys general across the country are looking into the company’s business practices. Herbalife responded with its own letter to Markey denying his allegations, though some of their comments seem to contradict previous statements.

While there have been Herbalife Ltd. (NYSE:HLF) critics for many years, the company has been under a microscope for much of the last year after Bill Ackman’s Pershing Square made a $1 billion short, saying that he was confident that Herbalife’s business model was illegal and that it would be forced out of business by regulators. He has since changed to options instead of short sales to protect himself, but has continued his campaign against Herbalife.

Update: The title of this article was edited after publication.

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