Shares Of Herbalife Fall After It Defends Itself Against Pyramid Scheme Accusations

(Herbalife)

(Herbalife)

Herbalife has been scrambling to do damage control and defend itself against accusations that it’s a fraud or as one hedge fund manager called it, a pyramid scheme. But after stating its case to the contrary yesterday, it seems investors are still unsure about whether they should risk their money in the company’s stock.

Shares of Herbalife fell by 1.8% yesterday, closing at $39.24. That’s a stark difference from the days when the stock traded as high as $72.69, points out the New York Times’ Dealbook blog.

At the center of the controversy is this: Herbalife sells nutritional supplements with a direct-selling method, by using a network of independent distributors. Those distributors then sell the products and make money with those sales, as well as getting commissions from other people they set up in the business.

Critics of Herbalife says that model really only rewards those on the top of the pile, while the people below get short shrift. But to counter that, Herbalife’s president says that 80% of the 100 top earners are people who make more than the distributors above them, calling the business a “meritocracy.”

Herbalife has worked that way for 32 years, and it claims it’s a “legitimate company, with legitimate customers.”

“Girl Scouts sell cookies on a direct-selling method, and nobody attacks them,” added CEO Michael O. Johnson.

The company’s executives set out to tell their side of things in an hours-long presentation to investors and analysts yesterday morning. In December, a hedge fund manager for Pershing Square Capital Management dubbed Herbalife a pyramid scheme and said he was betting against its stock.

After yesterday’s defense exercise, that same hedge fund manager says he wasn’t convinced, claiming “The company distorted, mischaracterized and outright ignored large portions of our presentation.”

It isn’t just hedge funds who are on the fence about the company, as the Securities and Exchange Commission is reportedly in contact with Herbalife.

Herbalife for its part seems determined to clear its name.

“We’re going to look at every means available to protect our reputation and move this company forward,” said Johnson.

Herbalife Shares Fall After Company Defends Itself [Dealbook]