Does the FTC Think Herbalife Is a Pyramid Scheme, Too?

In the last seven years, the U.S. Federal Trade Commission has received 192 complaints against the supplement-maker Herbalife (NYSE:HLF), and the agency has decided now is the time for an investigation, according to a New York Post exclusive.

Hedge fund manager Bill Ackman, who took a $1 billion short position on Herbalife, told CNBC in December that the company uses inflated pricing, misleading sales information, and a complicated incentive structure to hide what he termed was “little more than a pyramid scheme.” He called for regulators to look into the operation, and they did. While the company has repeatedly denied operating that scheme, the FTC provided the Post with more than 700 pages of complaints in response to a Freedom of Information Law request.

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A pyramid scheme is an illegal investment scheme that takes contributions from new investors to pay off original investors. The company has not yet responded to the news of the FTC’s probe into its business, but the company’s Chief Executive Officer Michael Johnson has said in the past that Ackman’s allegations were false. “This is blatant market manipulation,” Johnson told CNBC in a telephone interview. “This appears to be another attempt to legally manipulate the market by a group of short sellers.”
The complaints received by the FTC centered largely around the false promises made by Herbalife; many distributors found it difficult collecting payments and getting refunds. According to the Post, the allegations had been trickling in for months and years before Ackman went public with his accusation. Some told the FTC they thought the company was a pyramid scheme.

“I do not like the deception present. It’s one thing not to reveal every detail; it’s another to outright lie and encourage others to do so…you encourage lying,” read one submission seen by the publication. The woman who authored that complaint alleged that the company told her she would need to spend $6,450 a month to turn a profit. “If I quit, I have no hope of paying off the $7,000 [already due the company] left on the credit card,” she added.

Following Ackman’s initial attack against Herbalife, shares plummeted 38.7 percent, and with the commission’s allegations joining the tumult, shares are down 10.95 percent at $31.25 just before 9:30 a.m. Eastern Standard Time.

The FTC also shut down the company’s Kentucky marketing operations last week.

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