FTC Investigates Herbalife, Following Claims It’s A Pyramid Scheme

Transcript :

MELISSA BLOCK, HOST:

The Federal Trade Commission has launched an investigation into Herbalife. It’s a nutrition supplement company that’s accused of operating like a pyramid scheme. The company disclosed the investigation today.

Herbalife has been under attack by a billionaire investor named William Ackman. He’s been pressing politicians and regulators to look into the company, and he also stands to make millions if the company’s stock price takes a plunge.

NPR’s Jim Zarroli joins us now to talk about this. And, Jim, how much more can you tell us about the FTC’s investigation and just what it’s looking into with Herbalife?

JIM ZARROLI, BYLINE: Well, we don’t know a lot. I mean, we know Herbalife has said it’s received a civil investigative demand, which is a kind of subpoena. This is sort of the beginning stage of an FTC investigation. The commission does this, you know, 30, 35 times a year. And it really only leads to any kind of enforcement action a handful of times. So this, today, doesn’t really necessarily lead to anything.

BLOCK: Well, let’s talk a bit more about Herbalife. It’s called a multilevel marketing company. Why don’t you explain what that is and how it works?

ZARROLI: Well, that’s – Herbalife is sort of like – it’s a company like, you know, like Avon or Amway. It has distributors. It has more than three million of them. And they essentially – these distributors buy the company’s products and then they try to sell it to other people, usually people they know, but then they also try to recruit other people that they know into becoming distributors.

Now, Herbalife has really just grown tremendously over the years. Lately, it has been in the news mainly because of this campaign by William Ackman, who has shorted the company’s stock. In other words, he’s essentially betting that it will fall. So he has a very big financial incentive to see that company’s stock fall.

BLOCK: Yeah. And how exactly has William Ackman been going after Herbalife?

ZARROLI: Well, he has launched this, you know, extraordinary campaign. He’s enlisted civil rights groups to campaign against Herbalife. What he’s been saying is that, you know, Herbalife is a pyramid scheme. It exploits poor people and minorities by recruiting them into these distributorships. They get taken advantage of there. Ackman has been saying this for a long time. And lately, he’s also been attacking Herbalife’s operations in China, which are growing very fast. They – he says they violate the China’s laws against pyramid schemes.

The New York Times had a long piece this week about Ackman’s efforts to lobby members of Congress and regulators to try to get them to look into Herbalife’s operations. And, you know, now, at least he seems to have gotten his wish.

BLOCK: This is, Jim, a very high-profile bet that William Ackman has made on Herbalife, against Herbalife. How’s that going for him?

ZARROLI: Well, he actually has lost money so far. I mean, the company’s share price has been up and down over the past year, you know, since he started this. But in the past year, it’s gone up by more than 50 percent. Now, today, after the news of this investigation came out this year, the shares fell a bit. But, you know, as I said, there’s no guarantee that this investigation will go anywhere. So Ackman has a lot at stake here.

By the way, he says he’s doing this, you know, because he truly believes that Herbalife exploits people. He’s not trying to make money. He says if he personally makes any money, he will give it to charity, although his investors at Pershing Square Capital Management could make some money.

BLOCK: And very briefly, Jim, any response from Herbalife to both Ackman’s attacks and the FTC’s investigation?

ZARROLI: It says it welcomes the investigation because of all the misinformation out there, and it says it will cooperate with the FTC. It’s called Ackman’s campaign a cynical self-serving attempt to manipulate the market.

BLOCK: OK. NPR’s Jim Zarroli. Jim, thanks so much.

ZARROLI: You’re welcome. Transcript provided by NPR, Copyright NPR.