Hedge fund activist Bill Ackman’s campaign against Herbalife, which he claims is a pyramid scheme, gained a powerful new ally Thursday.
Sen. Edward Markey, a Democrat from Massachusetts, called on federal agencies to investigate the controversial diet shake seller. Shares of Herbalife fell about 13 percent on the news and were trading below $64 midday.
Ackman, who announced a $1 billion Herbalife short on Dec. 20, 2012, has been deeply underwater in the position since last July, after several other billionaire investors lined up against him, most notably Carl Icahn.
On Jan. 25, 2013, the pair went head-to-head for a half-hour on CNBC, although Icahn had not yet publicly announced his Herbalife investment at that time.
So far this year, with Herbalife down about 19 percent, Ackman’s Herbalife bet is taking a postive turn.
Markey’s letter to Herbalife CEO Michael O. Johnson
Markey’s letter to SEC Chairwoman Mary Jo White
Markey’s letter to FTC Chairwoman Edith Ramirez
Sen. Markey, who sent letters to the Federal Trade Commission, the Securities Exchange Commission and the LA-based company itself, questioned whether the company’s multilevel marketing business is actually a pyramid scheme. He asked for a response from all three by Feb. 28.
More than 100 other dissenters, including at least three Hispanic representatives in Congress, have sent such a letter, but Sen. Markey is the first senator to do so. A member of the Senate’s Commerce, Science and Transportation Committee, he said he had become concerned about Herbalife after hearing from constituents about their losses.
“One family in Norton, Mass., reported that it lost $130,000, including the family’s entire 401(k), investing in Herbalife,” he wrote. “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.”
In his six-page letter to Herbalife, Sen. Markey asked the company to provide the net profit its distributors make — a number that has never released — and to tell how much they make selling product to those outside the system itself. The FTC and the courts have said companies are pyramid schemes if most of the sales occur within the system.
In a statement, Herbalife said, “We received the letter from Sen. Markey this morning and look forward to an opportunity to introduce the company to him and address his concerns at his earliest convenience.”
The FTC declined to comment. The SEC could not be reached, but the agency is already investigating Herbalife.
In a press release announcing the letters, Sen. Markey added, “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.”
Several consumer groups were the first to press for a probe and numerous other lawmakers outside Washington have also requested an FTC investigation. Recently, a group that represents Hispanic police officers in New York City also weighed in.