Herbalife Ltd shares tumbled nearly 10 percent on Thursday as investors grew concerned about the possible fallout from a regulatory probe in China into Nu Skin, which has a similar business model to the nutrition and weight loss company.
The development could benefit billionaire investor William Ackman, who has placed a $1 billion bet that Herbalife's stock price will eventually fall to zero under regulatory scrutiny for what he has called a pyramid scheme. Operators of pyramid schemes typically try to make money by recruiting new members, who pay fees, rather than relying only on the sale of goods.
Herbalife has vehemently denied Ackman's claim that it's operating a pyramid scheme.
Chinese officials said on Thursday that they are investigating whether Nu Skin Enterprises is operating an illegal pyramid scheme after a Communist Party newspaper, the People's Daily, said that the U.S.-based company was using sales tactics "akin to brainwashing." Nu Skin, which makes anti-aging skin-care and nutritional products, said in a statement on Thursday that "we are aware that Chinese regulators have now initiated investigations to review issues raised by recent news reports." Nu Skin's stock plummeted 26.4 percent on Thursday to close at $84.80 on the New York Stock Exchange.
For some investors and academics, the Nu Skin scrutiny raised the chances that Chinese regulators might soon broaden their probe to look into Herbalife, whose global operations include China.
"The business models of these two companies, Nu Skin and Herbalife, are absolutely similar," said William Keep, dean of the School of Business at the College of New Jersey, who has written extensively on multi-level marketing. "And it would not be a large leap for Chinese officials to make that they should also look at investigating Herbalife."
Keep said he had received numerous inquiries from Wall Street investors about what constitutes a pyramid scheme since Ackman placed his $1 billion short bet against Herbalife in 2012. Big-name investors, including Carl Icahn and George Soros, have taken stakes in Herbalife, lining up against Ackman.
Icahn did not return a call on Thursday.
A spokeswoman for Ackman declined to comment.
Herbalife spokeswoman Barbara Henderson did not comment on whether the company expects a Chinese inquiry, but said in an email: "We are confident in our consumption-based business model in China."
Still investors were clearly concerned as Herbalife's stock slid 9.8 percent to close at $71.63 on Thursday. The stock has tumbled 8.98 percent for the year so far, after a surge of 138.92 percent in 2013.
For Ackman and investors in his $12 billion Pershing Square Capital Management, the probe into Nu Skin might represent a glimmer of hope that his short position, which has lost as much as $500 million, might still pay off.
In December, Ackman said that he would soon share publicly details of his own investigation that he had already given to U.S. regulators that Herbalife was probably violating multi-level marketing restrictions in China.. In his year-long campaign against Herbalife, he approached the Securities and Exchange Commission, the Federal Trade Commission and various state regulators with information that he believes will support his claim that Herbalife is running a pyramid scheme in the United States.
Regulators have declined comment.
Keep said he also approached the FTC last summer, urging the agency to investigate pyramid schemes and pointing out that both Herbalife and Nu Skin may overstate the financial opportunities they promise their distributors.
An audit of Herbalife's books released in December showed no material changes to its financial statements.
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