Herbalife shares drop on report of Canadian inquiry

Boston | Reuters — Herbalife shares fell as much as 3.5 per cent on Tuesday following a report that Canada’s top consumer regulator has launched a formal probe into complaints that the nutrition and weight loss company runs a pyramid scheme.

The New York Post, citing unnamed sources, reported Tuesday that the Canadian Competition Bureau has interviewed former Herbalife distributors and can now apply for “information gathering orders.”

The report comes less than a week after U.S. Senator Edward Markey called on two U.S. regulators, the Securities and Exchange Commission and the Federal Trade Commission, to investigate the company, sending the stock down 15 per cent.

A spokesman for the Canadian authority declined to confirm or deny any investigation. A spokeswoman for Herbalife said, “We are unaware of any investigation and have not been contacted.”

Herbalife’s Calgary-based Canadian arm markets products such as protein shakes and powders, teas, skin care products and a weight-management program.

The Competition Bureau in 2004 slapped a C$150,000 fine on one Herbalife distributor, Global Online Systems (GOLS), operating in Canada. The bureau at the time said its investigation found GOLS “was operating a scheme of pyramid selling” involving “health-related products marketed by Herbalife Canada.”

Participants in GOLS’s plan “were compensated for the recruitment of new participants and had to buy specific quantities of products as a condition of joining the plan,” the bureau said at the time.

GOLS and its participants also “recruited new participants by exaggerating income expectations without disclosing the income of a typical participant,” the bureau said, noting its order required GOLS’s operators to disclose the “average income actually received by all participants.”

Herbalife’s share price has been a battleground for billionaire investors for more than a year. William Ackman has accused the company of running a pyramid scheme, something Herbalife vehemently denies, and bet US$1 billion that its share price will go to zero when regulators shut the company down.

On the other side, Carl Icahn and, more recently, William Stiritz are big owners who expect the stock price to go up.

Investors following the Herbalife story speculated that Canada may be investigating the generation of sales leads. The company prohibited “lead generation” methods to find new distributors at the end of June, but Ackman, in a letter to investors sent last year, said those practices, promoted by the company’s top distributors, are still being used.

Herbalife’s Henderson said Canadian sales represent less than one per cent of total sales.

On Monday, Herbalife’s share price climbed 6.7 per cent when Stiritz, Herbalife’s fourth-largest investor, hired Timothy Ramey, a well-known Herbalife analyst, to work for Post Holdings, the company he runs. Stiritz’ investment in Herbalife was made for his private account and had nothing to do with Post, the company said previously. But Ramey, who worked for D.A. Davidson, will be director of strategic ventures at the company Stiritz runs.

Since the start of the year, Herbalife’s share price has dropped 22.43 per cent, which helps shrink the paper loss Ackman’s US$12 billion Pershing Square Capital Management has sustained on the investment he made public in December 2012.

— Svea Herbst-Bayliss is a Reuters correspondent based in Boston. Additional reporting for Reuters by Caroline Valetkevitch and Alastair Sharp. Includes files from AGCanada.com Network staff.

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