Health Supplement Herbalife Being Investigated For Targeting Minorities With Pyramid Scheme

April 21, 2014  |  

Illinois Attorney General Lisa Madigan is investigating the health supplement Herbalife for allegations that the company has been operating as a pyramid scheme that targets minorities. The investigation is based on consumer complaints that the company denies.

“We look forward to working with the Illinois Attorney General’s office to resolve the consumer complaints it has received,” Herbalife said in a statement.

The company is also said to be under investigation by the FBI, the New York Attorney General, the Federal Trade Commission (FTC), and the Securities and Exchange Commission. The pyramid scheme allegation first arose in December 2012 when a hedge fund manager, Bill Ackman, first tossed it out based on his analysis. Ackman went on to risk $1 billion on the company’s stock falling. Herbalife stock ended up growing by 100 percent and Ackman pulled back on that bet.

The Los Angeles Times describes Herbalife’s business model as such:

“Herbalife sells diet and nutrition products through a network of millions of distributors in more than 80 countries around the world. Its products are not available in stores.”

Ackman says most people lose money by becoming distributors. The only ones making any cash got in on the business early. Herbalife has always maintained that the business is on the up-and-up, and has billionaire investor Carl Icahn on its side. Icahn owns 17 percent of the company’s stock and has several seats on the board.

The FTC investigation was only announced in mid-March, and also because of questions about the company’s business practices.

The investigations are having an impact on the health of the business with the company’s stock yo-yoing up and down. Stock on Friday was up 10 percent before closing up only 4.4 percent at $53.75. Stocks fell 15 percent back in March when the FTC opened its investigation as well. According to USA Todaysales of Herbalife totaled $4.8 billion in 2013, up from $4.1 billion in 2012.

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