FBI 'probing Herbalife's marketing
practices'
New York - The Federal Bureau
of Investigation (FBI) is probing Herbalife, the multi-level
marketing company that hedge fund manager William Ackman called a
pyramid scheme, sources familiar with the investigation said.
The news, first reported by the Financial Times
last Friday, sparked a sharp sell-off that sent the stock price
down nearly 14 per cent that day.
The firm has steadfastly denied running a pyramid
scheme, where distributors earn more money for recruiting new
members into the scheme than they do by selling products to
consumers.
News of the FBI probe comes about a month after
Herbalife confirmed that the Federal Trade Commission had issued a
civil investigative demand to the firm to look more closely at how
it works.
Herbalife, which reported sales of US$4.8 billion
(S$6 billion) last year, employs a vast network of independent
distributors who sell its nutritional powders and shakes in more
than 80 countries, including China, its fastest-growing market.
It has an office in Singapore located on Orchard
Road. Listed on its Singapore were reasons why interested parties
were reasons why interested parties should sign up as independent
distributors such as "a generous compensation plan" and "a proven
business model".
It also features success stories of product users
who eventually went on to become distributors.
In the United States, it has been a battleground
for heavy-hitting investors. Mr Ackman, who runs the US$13 billion
hedge fund Pershing Square Capital Management, first called the
firm a fraud in December 2012 when he unveiled a US$1 billion short
position against the company.
Since then, billionaire investors Carl Icahn,
George Soros, Daniel Loeb and William Stiritz have taken the other
side of the bet, helping push the stock price up 138 per cent last
year.
Their involvement has comforted other investors
that Herbalife will eventually get a clean bill of health, one
investor said.
But Mr Ackman is sticking by his forecast that the
company's share price will eventually fall to zero after regulators
start looking at the company more closely.
Pershing Square has published dossiers on
Herbalife's distributors, charging that they lure in recruits with
videos featuring big houses and expensive cars even though company
statistics show that the majority of them never earn income from
Herbalife.
Mr Michael Araujo, a Massachusetts resident whose
family lost roughly US$85,000 on the scheme, said in an interview
on the company's sales tactics: "They target people who are
desperate."
Reuters
With additional reporting by Carolyn Khew
World, The Sunday Times, April 13 2014, Pg 28
