The US Federal Trade Commission has launched an investigation into nutritional supplement company Herbalife following more than a year of scrutiny over its business practices. The Los Angeles-based company, which has been accused of being a pyramid scheme, said it was being investigated today, briefly halting trading of the stock and putting its future into question.
Making health supplements or a pyramid scheme?
Responding to the investigation, which was first reported by the Financial Times' Alphaville blog, Herbalife maintained that its business was within the confines of the law. "Herbalife welcomes the inquiry given the tremendous amount of misinformation in the marketplace, and will cooperate fully with the FTC," the company said in a statement. "We are confident that Herbalife is in compliance with all applicable laws and regulations."
Herbalife's business revolves around selling supplements, but not directly to consumers through retail stores. Instead, the company enlists non-employee distributors who sell to friends and family, or on the internet. It's a similar model to companies like beauty product seller Avon, along with Amway, a company that relies on others to help sell household goods and health supplements. Last December, the FTC made fairly clear in a case against another company selling business learning courses that it considers a pyramid scheme something involving "perpetual recruitment" that "dooms the vast majority of the participants (well above 90 percent) to financial losses by the very design of the compensation plan."
Since December 2012, Herbalife has been the target of hedge fund manager Bill Ackman, who has courted lawmakers and the public to force either the FTC or the SEC to conduct an investigation into whether or not Herbalife operates as a pyramid scheme. Ackman even made a billion dollar bet (via "short sale") that Herbalife was a pyramid scheme and would eventually be shut down.
Matt Stroud contributed to this report.