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Herbalife shares drop as U.S. Senator probes ‘pyramid’

Massachusetts Senator Edward Markey is asking for information about the business practices of Herbalife Ltd, his office said on Thursday, making him the most prominent lawmaker to call for a probe into the nutrition company that billionaire investor William Ackman claims is a pyramid scheme.

Herbalife shares tumbled more than 14 per cent after Markey, a Democrat, said he had written to the U.S. Securities and Exchange Commission (SEC), the Federal Trade Commission (FTC) and to Herbalife itself to try to obtain more information.

“There is nothing nutritional about possible pyramid schemes that promise financial benefit but result in economic ruin for vulnerable families,” Markey said. He said the call for a probe followed “serious complaints of improper pressure and financial hardship” from constituents.

Herbalife spokeswoman Barbara Henderson said the company had received the letter and looks “forward to an opportunity to introduce the company to him and address his concerns at his earliest convenience.”

It was the second big hit to Herbalife’s stock so far this year. Last week, shares tumbled 10 per cent on the heels of a regulatory probe in China into skincare products maker Nu Skin, which has a similar business model to Herbalife.

The battle for the future of Herbalife has been raging for over a year after prominent activist investor Ackman accused the company of running a pyramid scheme – an unsustainable business model that focuses more on recruiting salespeople than on selling to outside customers.

Ackman backed his accusation with a $1bn short bet that the company’s share price would drop to zero under regulatory scrutiny, and began approaching lawmakers and regulators with his evidence.

Since then, major investors including Carl Icahn have lined up against Ackman’s bet by taking stakes in the company, making Herbalife shares some of the most closely watched on Wall Street. The stock price surged 139 per cent in 2013, but has fallen a total of 16.6 per cent so far this year.

S&P Capital IQ analyst Tom Graves lowered the company’s 12-month target price to $65 from $75 “to reflect our view of increased risk, after U.S. Senator Edward Markey seeks an SEC and FTC investigation.”

The SEC has in recent years routinely reviewed Herbalife’s public disclosures and requested additional information, including on how its distribution network is organised, and more recently on its relationship with Icahn.

Markey wrote in the letters that his interest in Herbalife was sparked by constituents in Massachusetts who claim to have lost thousands of dollars buying supplies that they could not sell on to customers. He said one family in Norton said it lost $130,000, including its entire retirement fund, from investing with the company.

Another woman said she was pressured to recruit family members and spend more money to buy more products so that she could qualify as a “supervisor” in the Herbalife system.

Markey’s move comes after Nevada’s State Senate Majority Leader Mo Denis in December asked his state’s attorney general for an investigation into the supplement maker for alleged targeting and deception of Hispanics.

Latino civil rights activists have also asked prosecutors in California and Illinois to probe the company’s marketing practices.

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