Herbalife gets more bad news: Illinois AG investigation

Herbalife operates out of headquarters in downtown Los Angeles, but also houses many employees at this building in Torrance.

By Stuart Pfeifer

April 17, 2014 2:19 PM PT

The bad news is piling up for Herbalife Ltd.

Illinois Atty. Gen. Lisa Madigan is investigating complaints that the Los Angeles weight-loss and nutrition company operates a pyramid scheme, Maura Possley, a spokeswoman for the attorney general, said Thursday.

“We’ve received consumer complaints and are investigating based on those complaints,” Possley said.

The news follows reports that the FBI, Securities and Exchange Commission, Federal Trade Commission and New York attorney general were also investigating the company.

Herbalife said in a statement that its business model is legal and vowed to cooperate with the investigation while continuing to operate in Illinois, where the company said it has more than 15,000 distributors “and many more satisfied customers.”

“We are confident in the integrity of our longstanding business and the company’s compliance with applicable laws and regulations,” Herbalife said in a statement. “We look forward to working with the Illinois attorney general’s office to resolve the consumer complaints it has received.”

Herbalife shares, which had been positive early Thursday, fell on the news. The stock closed down 17 cents, or 0.3%, to $55.10.

The company has been fighting allegations about its business model for more than a year. The controversy erupted in December 2012 after hedge fund manager Bill Ackman said he had concluded after extensive research that Herbalife operates a pyramid scheme that victimizes people who sign up to sell its products.

Ackman bet more than $1 billion that the company’s stock price would fall, a position he trimmed last year when the shares increased more than 100%.

Herbalife sells diet and nutrition products through a network of millions of distributors in more than 80 countries around the world. Its products are not available in stores.

Most of the company’s distributors -- it now refers to them as “members” -- end up losing money, while a few who joined the company early make huge profits from recruiting bonuses, Ackman said.

Herbalife has maintained that its business model is perfectly legal and that most of its members sign up to receive discounts on products they personally consume, not to make a career out of selling them.

Billionaire investor Carl Icahn has sided with Herbalife, buying 17% of the company’s shares and securing several seats on its board.