Herbalife's (HLF) business practices have come under intense scrutiny since activist William Ackman issued a claim that the company is mere pyramid scheme, and placed a $1 billion bet on his belief.
The nature of Herbalife's business is one that will always lead to debate. Herbalife does not sell its products in retail stores. Instead, people who sign up to market Herbalife products sell them. In order to increase their income, these same people then go out and recruit other people to sell under them.
This is referred to as multilevel marketing, and it is not unique to Herbalife. It can easily be seen as a pyramid scheme, but as long as everything is done by the books, there is absolutely nothing illegal about the model.
Two other companies that use the identical strategy are Avon (AVP) and Amway. It is all legal as long as there are real customers buying real products.
Ackman has argued that Herbalife is not playing the game fairly, and Monday we got news that the Federal Trade Commission is doing its own investigation into the matter.
The New York Post requested information from the FTC using the Freedom of Information Act and determined that over the past seven years there were 192 complaints filed against Herbalife.
Some of the complaints included false promises made the company and distributor complaints over difficulty in getting refunds and monies owed.
While it is not unusual for a company as big as Herbalife to receive complaints, what was most interesting is that the FTC redacted some information because some of it was obtained “in a law enforcement investigation.”
Last month, the Securities and Exchange Commission opened its own review of the company, and if the FTC is indeed in the middle of its own investigation, then Herbalife has a lot to worry about.
One person, who is more than happy about today's news is William Ackman. With a $1 billion short position on the company, this is exactly the news that he wanted to hear to start off his week.
Michael Fowlkes is a financial writer who has been with the Fresh Brewed Media family since 2004. Over the course of his tenure with Fresh Brewed Media, he has worn many hats, including portfolio manager, options analyst, and writer. Michael received his undergraduate degree from Virginia Tech in Accounting and got his start in finance working as a stock trader for six years at Chase Investment Counsel in Charlottesville, Va. His articles typically cover big-picture events and forecasting what impact they will have on the stock market. In addition to writing for Fresh Brewed Media, Michael also wrote for AOL's BloggingStocks for three years, focusing most of his attention on the energy and technology sectors. Follow him on Twitter at @MFatMICenter.