FTC launches Herbalife probe

FTC launched an inquiry into Herbalife Ltd., the marketer of nutritional products revealed today.

Herbalife, which was accused by billionaire hedge fund manager Bill Ackman of operating a pyramid scheme, said it received a civil investigative demand (CID) today from the FTC, but declined further comment about the specific inquiry.

"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."

Frank Dorman, an FTC spokesman, said the agency could not comment on the nature of the inquiry, though he acknowledged the existence of an investigation.

Some minority groups and lawmakers on Capitol Hill have called for an FTC investigation into Herbalife amid allegations that the fast-growing company exploits low-income distributors and heavily rewards distributors based on their recruitment rather than actual sales of weight-loss shakes and other products to customers outside the network.

Herbalife reported an annual profit of USD $527.5 million on $4.8 billion in sales, and has 3.7 million "members" (formerly known as distributors) in 91 countries around the world.

Ackman presentation on China

The FTC probe was announced just one day after Ackman cast the bait in an online presentation Tuesday to lure the Chinese government into investigating whether Herbalife has violated the country's direct selling regulations and prohibition against pyramid schemes. 

Ackman's Pershing Square Capital Management accused Herbalife of paying royalties to Chinese distributors based on their downline network and rewarding members for their recruiting efforts by disguising compensation as hourly wages in the world's most populous country.

Herbalife's sales have skyrocketed in China where the government bars traditional multi-level marketing and is investigating pyramid scheme allegations against Nu Skin Enterprises, a marketer of skin care products and nutritional supplements.   

Ackman bet $1 billion that Herbalife will fall into financial ruin, leading skeptics to question his credibility, and a March 9 New York Times article exposed his massive lobbying efforts to influence regulators, lawmakers and minority groups.

Although the New York native has reportedly incurred hundreds of millions of dollars in paper losses on his short bet against Herbalife because the stock price has climbed, he is not ready to fold his cards.

"I expect the government will have to determine whether or not Herbalife is a pyramid scheme," Ackman predicted Tuesday.

China—one of the most restrictive direct selling markets in the world—is the new battleground in the war of words between Ackman and Herbalife.   

Aaron Smith-Levin of OTG Research Group, which Pershing Square retained, described a multi-tiered network in which Chinese distributors are rewarded for recruiting others into joining a network and purchasing Herbalife products despite China's explicit prohibition against such compensation arrangements.

David Klafter, senior counsel with Pershing Square, laid out the claims in more blunt terms: Herbalife, he said, is violating civil and criminal laws.

Herbalife denied the allegations, maintaining it complies with China's direct-selling and anti-pyramid regulations."The presentation reflects Mr. Ackman’s continued failure to fundamentally understand Herbalife’s business model," Herbalife said in a statement.