The FBI is probing the business practices of the weight-loss company Herbalife, a company hedge fund executive William Ackman’s has called a pyramid scheme. The new of an investigation has caused a massive sell off that has taken the Herbalife stock down 14 percent. Herbalife is denying any rumors that they are involved in running a pyramid scheme in which distributors earn a bigger commission for enrolling new members onto a plan than by selling merchandise to consumers.
A source has said the investigation has been ongoing quite a while, but would not go further into detail. A spokesperson for the FBI in Boston refused to validate claims regarding the investigation and no charges have been filed so far.
Past Herbalife distributors who were contacted by Reuters said they had been also reached out to by FBI agents who seemed interested in learning more about the company’s business practices, as well as how the company recruited new members and distributed products. FBI agents probing Herbalife were also said to be obtaining documents from former distributors and reviewing them.
The news come a month after Herbalife confirmed the Federal Trade Commission had delivered a civil investigative demand to them in order to find out how they operate. U.S. Senator Edward Markey asked the Securities and Exchange Commission and the Federal Trade Commission to investigate Herbalife because of the alleged unfair targeting of minorities. The company has denied these allegations as well.
Herbalife reported $4 billion in sales last year. The company has employed a large network of independent suppliers who sell weightless supplements and shakes in over 80 countries. China is said to be the company’s fastest growing market.
Investors have been battling over the whether the company would succeed or fail since 2012 when investor William Ackman uncovered a billion dollar bet against the company’s success. Since then investors like William Stiritz, Carl Icahn, and Daniel Loeb have driven up the company’s stock 138 percent. The investors were hoping Herbalife would eventually squash the doubts of those who felt they would lose. They now have to worry about a whole new set of problems.
Many of the distributors may welcome the probing of Herbalife from the FBI since there are claims they do not earn meaningful income working for the company. Michael Araujo, a native of Massachusetts, says he tried build a distribution business through Herbalife for a year after being laid off. Araujo claims his family lost around $85,000 trying to make the business model work spending $7,000 a month to buy Herbalife products, and $4,000 on business leads. When asked about the company’s sales tactics Araujo said they look for and target people who are desperate to make an income.
However not all reports on the company are negative ones. Texas resident Tish Rochin is a distributor who says she made it to millionaire status because of Herbalife. Pershing Square has released reports about Herbalife’s top distributors accusing them of luring new recruits in with videos showing expensive cars and big houses yet statistics for the company reveal that most distributors never earn income from the business. All claims made are not final and are pending the results of the investigation.
By Sarah Wright