Should Herbalife Investors Be Worried Now?

(Originally published here.)

It was only last week that shares of dietary-supplement distributor Herbalife Ltd. took abeating after Chinese regulators announced they were going to investigate Nu Skin Enterprises Inc., which has a similar business model. Now the multilevel marketer has an even bigger problem: U.S. politicians.

Democratic Senator Ed Markey of Massachusetts sent letters today to the Securities and Exchange Commission and the Federal Trade Commission asking the agencies to investigate Herbalife’s business practices. One issue is how many people outside of the company’s network of distributors actually buy any of Herbalife’s products. Another is whether distributors were misled into thinking that they could make money without recruiting more distributors.

Perhaps no one has as much at stake as hedge-fund manager Bill Ackman, who has been betting that Herbalife will collapse once regulators come around to his view that the company is a pyramid scheme. For today, at least, his view seems to be prevailing: Herbalife’s stock dropped as much as 13 percent.

It’s worth noting that shares of multilevel marketers Nu Skin and Usana Health Sciences Inc. haven’t fallen in sympathy with Herbalife, even though all three fell when China’s regulators singled out Nu Skin for investigation.

Markey’s letter is the latest, and most significant, involvement by elected officials in the fight over Herbalife. The company’s distributors are disproportionately Hispanic, so Ackman had been focusing his efforts on getting the Congressional Hispanic Caucus to present a united front to the Federal Trade Commission, the agency with primary responsibility for overseeing multilevel marketers.

Unfortunately for him, one member of that caucus, Democratic Representative Xavier Beccera of California, happens to host Herbalife’s headquarters in his district. According to Politico, “the company has contributed heavily to his reelection efforts.” This didn’t stop another California Democrat, Representative Linda Sanchez, from sending her own request asking the FTC to investigate back in June. Unlike Markey, Sanchez’s letter didn’t have any discernible effect on Herbalife’s stock price.

Like any good corporate brawler, Herbalife has brought in the lobbyists to fight back and lined up influential allies. In addition to Beccera, supporters of the company include former Secretary of State Madeleine Albright and former Los Angeles MayorAntonio Villaraigosa. Those connections may help explain why the government has moved slowly in response to Ackman’s allegations. (As an aside, a Belgian court recently ruled that Herbalife isn’t a pyramid scheme.)

Markey has given one month for regulators and Herbalife to answer his questions. It will be interesting to see the answers.

(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter.)

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About Matthew C. Klein

I write about the economy and financial markets for Bloomberg View. Before that I wrote for The Economist on a fellowship provided by the Marjorie Deane Financial Journalism Foundation. I have worked at the world's largest hedge fund and read every FOMC transcript since May, 1987.
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