Herbalife stock fell a staggering 13% Thursday after U.S. Senator Ed Markey, a Democrat from Massachusetts, said he has called on both the Securities and Exchange Commission and the Federal Trade Commission to look into the nutritional supplement company for running a pyramid scheme after receiving several complaints from its constituents.
Herbalife is a multi-level marketing company where employees make money by selling Herbalife’s weight loss products and recruiting new sales representatives. These distributors take a portion of the sales from members they recruit, which is legal.
But the FTC says that multi-level companies would be deemed an illegal pyramid scheme if salespeople sell more products to other distributors rather than to the public or if they make more money from recruiting than they do from selling products per CNN News. The problem lies in that lower-level distributors may be stuck with unsold products.
Ackman has dubbed Herbalife a “pyramid scheme” for over a year now. The hedge fund titan first announced his short position, a bet that Herbalife stock would fall, in December 2012. In fact, he said that he thinks eventually the company’s stock will be worthless.
So after, Ackman has lost a substantial amount of money on his Herbalife investment because soon after he declared he was shorting it, billionaire activist investor Carl Icahn bought a big position in Herbalife. Icahn’s Icahn Enterprises is now Herbalife’s biggest shareholder with a close to 17% stake in the company.
According to released public records, Ackman did not make any donations to Markey’s campaign last year. Ackman did, however, make a $32,400 donation to Democratic Senatorial Campaign Committee back in April 2013. Markey won a special election back in June to complete John Kerry’s term when Kerry resigned to become Secretary of State.
“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,” Markey said in his statement. “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.”