Herbalife Ltd. shares fell 10% Thursday after China said it would investigate whether multi-level marketing company Nu Skin Enterprises Inc. operates a pyramid scheme.
The Chinese government said it would investigate Nu Skin one day after a newspaper in China accused Nu Skin of running a pyramid scheme.
Nu Skin confirmed the investigation and said in a statement that it had launched a “province-by-province business review and will invite relevant regulators to provide guidance.”
The company also said it would take steps to improve training and education of employees in China and cautioned that sales will be affected: “As we work through this evolving situation and remain focused on long-term growth, there will likely be a negative impact on China revenue."
Nu Skin shares fell $30.43, or 26%, to $84.80.
The news weighed on Herbalife, because the company operates a similar sales model. Both companies rely on networks of independent sales people to sell their products. They each have strong presences in China.
Herbalife shares lost $7.75 to $71.63.
Herbalife spokeswoman Barbara Henderson said: "We are confident in our consumption-based business model in China."
Herbalife has been one of the most scrutinized companies in the United States since December 2012, when activist investor Bill Ackman accused it of operating a pyramid scheme. He said the company’s business model was unlawful because many of its distributors make more money recruiting new sales people than they do from actual sales.
Ackman said he bet more than $1 billion that the company's stock price would fall, but later reduced the position as the company's shares soared.
Herbalife has denied those allegations, noting that most of its distributors join the company to receive discounts on nutrition and weight-loss products they personally consume. The company said its business model is legal and used by several other multi-level marketing companies.
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