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Massachusetts Senator Edward Markey (D) has sent letters to the Securites and Exchange Commission and Federal Trade Commission asking that they look into Herbalife's business practices.
Herbalife's stock was last trading down nearly 11 percent after falling as much as 14 percent.
"There is nothing nutritional about possible pyramid schemes that promise financial benefit but result in economic ruin for vulnerable families. Herbalife may be a purveyor of health and wellness products, but some of its distributors are suffering serious economic ill-health as a result of their involvement in the company. I have serious questions about the business practices of Herbalife and their impact on my constituents, and I look forward to receiving responses to my inquiries," Senator Markey said in a statement.
Herbalife spokeswoman Barb Henderson said the company will address Senator Markey's concerns.
"We received the letter from Senator Markey this morning and look forward to an opportunity to introduce the company to him and address his concerns at his earliest convenience," she emailed in a statement to MarketWatch.
Herbalife is a multi-level marketing company that sells nutritional products such as weight loss shakes and supplements.
The California-based company's stock has been at the center of a massive hedge fund war for over a year now.
Hedge fund manager Bill Ackman, who runs Pershing Square Capital Management, is short Herbalife.
In December 2012, he publicly announced he's shorting more than 20 million shares of the company with a price target of $0. Ackman believes that Herbalife operates as a "pyramid scheme" and that regulators will be persuaded to investigate the company and shut it down.
Herbalife refuted Ackman's claims.
Not everyone in the hedge fund world has agreed with Ackman's thesis, though. A number of hedge fund managers, including Ackman's rival Carl Icahn, have gone long the stock.
Since Ackman publicly confirmed that he's betting against the stock, Herbalife's shares have risen nearly 73%.
Today, however, is the stock's biggest sell-off in a while.
Here's the statement from Senator Markey's office:
Washington (January 23, 2014) After hearing serious complaints of improper pressure and financial hardship, including from a constituent in Massachusetts who lost her entire retirement savings, Senator Edward J. Markey (D-Mass) is calling for more information about the business practices of Herbalife Ltd. In letters sent today to the Securities and Exchange Commission (SEC), the Federal Trade Commission (FTC) and to the company itself, Senator Markey queried each for more information about Herbalife's operations.
Herbalife, which sells nutritional and weight-loss products through individual distributors, promises its sellers significant monetary compensation in the form of additional bonuses and royalties if they recruit new sellers and establish their own network of product distributors. This compensation system appears to strongly favor distributors who focus on selling to other distributors rather than the general public, a common feature of pyramid schemes. Concerns also have been expressed that Herbalife aggressively markets its business opportunities to lower-income and vulnerable communities, many of whom are at greater risk if they invest their savings in business ventures that have little potential to turn a profit. According to 2012 data from the company itself, 88 percent of product distributors received no payments from the company at all.
One family in Norton, Massachusetts reported that it lost $130,000, including the family's entire 401(K), investing in Herbalife. Another Massachusetts resident claimed that she was encouraged to recruit new members by approaching her family and also received pressure to spend money to buy more Herbalife products so that she could qualify as a so-called "Supervisor" in the Herbalife system. She also stated that she was encouraged to stay in the program even after she said she wanted out.
"There is nothing nutritional about possible pyramid schemes that promise financial benefit but result in economic ruin for vulnerable families," said Senator Markey, a member of the Commerce, Science and Transportation Committee. "Herbalife may be a purveyor of health and wellness products, but some of its distributors are suffering serious economic ill-health as a result of their involvement in the company. I have serious questions about the business practices of Herbalife and their impact on my constituents, and I look forward to receiving responses to my inquiries."
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