Nu Skin, the Utah-based purveyor of anti-aging skin-care products whose shares were crushed earlier this month after a news report in China said the government there was looking into whether it is violating anti-pyramid laws, isn’t the only US multi-level marketer that could feel the regulatory heat.
It turns out that Herbalife, which sells protein shakes and other nutritional supplements through a multi-level marketing model similar to Nu Skin’s, has also been targeted as a pyramid in the Chinese media, The Post has learned.
An investigative report in First Financial Daily, also known as China’s Business News, said “suspicion has been brought up” that Herbalife is not operating in accordance with China’s laws prohibiting multi-level marketing and therefore may be a pyramid scheme.
The paper’s report received little notice when it was published last August.
But a similar report on Nu Skin last week in China’s People’s Daily gained widespread coverage, leading Chinese authorities to say they are investigating that company.
So far, Chinese authorities have not said they are looking into Herbalife. In a statement, Herbalife said, “We are confident in our consumption-based business model in China.”
Shares of NuSkin fell 41 percent last week on the news that Chinese authorities were looking into its business practices. Herbalife dropped 12 percent on the news that the entire industry is under scrutiny.
This week, it fell an additional 11 percent Thursday after Sen. Ed Markey (D-Mass.) called on US regulators to investigate the company to see if it was a pyramid scheme.
A company can be considered a pyramid scheme when most of its sales are to its own distributors and not to people outside its network.
Los Angeles-based Herbalife, which uses a network of distributors to sell its protein shakes, strongly denies it is a pyramid scheme.
In a press conference last week, Shen Danyang, a spokesman for China’s Commerce Ministry, indicated that the government is in favor of “cracking down on pyramid schemes and direct selling that violates regulations.”
First Financial Daily’s investigative reporter said he was told by an Herbalife sales representative that he had to buy about $2,000 worth of product to qualify to become a “direct sales representative,” the name the company gives its distributors in China, according to a translation of the article by the Hong Kong office of a US law firm.
That sum that is equal to about one-third of the annual per capita income in the country.
The individual recruiting him said he was making more than $3,000 a month as a sales rep for Herbalife and added that the protein shake had “detoxification and anti-stress” effects, among other unproven health claims, the article revealed
“The pay-to-play aspect, exaggerated income claims and false product claims are signs that Herbalife could be engaging in pyramid behavior in China,” said Robert FitzPatrick, a pyramid expert who advised Chinese consultants who helped the government write its anti-multi-level marketing law in 2005.
The article seems to support claims by hedge-fund activist Bill Ackman about Herbalife’s Chinese practices. Ackman confirmed to The Post that he will make a presentation in February unveiling the evidence that his investigators have uncovered in China that he says shows Herbalife likely operates illegally there.
Herbalife maintains it operates legally in China.
Ackman’s new Chinese front in his war on Herbalife — which he alluded to in a December investor letter — comes as his $1 billion short remains under water more than a year after he announced it. Since then, no US regulators have not taken action to shut the company down, as he had hoped.
China is Herbalife’s third-largest market. The company has been growing rapidly there, with sales increasing 77 percent in the third quarter of 2013 compared to the year-earlier period.
DA Davidson analyst Tim Ramey projects that China will be Herbalife’s biggest market by 2015.
Multi-level marketing is specifically prohibited in China, and US companies are supposed to alter their practices in that market.
The article suggests Herbalife may not have done so, said FitzPatrick.
He thinks China’s investigation of Nu Skin is an indication the country is willing to take on big companies. In the US, he said, the Federal Trade Commission has so far focused only on very small players ever since losing its case against Amway in 1979.
First Financial Daily is part of China Business Network, one of the country’s most influential media groups.