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U.S. senator calls for investigation of Herbalife; shares tumble

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Sen. Edward J. Markey is urging federal regulators to investigate the business practices of Herbalife Ltd., making him the most prominent figure yet to express concern about the Los Angeles maker of nutrition and personal care products.

Herbalife shares were down about 12% Thursday morning on reports of Markey's intervention.

The Massachusetts Democrat asked the Securities and Exchange Commission and Federal Trade Commission to investigate Herbalife, saying he had "serious questions" about the way the company pays its independent sales staff.

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Markey's concern comes 13 months after hedge fund manager Bill Ackman accused Herbalife of operating a pyramid scheme, saying the company improperly rewards its independent distributors for recruiting others into the business. Ackman's accusations battered the company's stock, but its shares soared more than 100% last year as the company deflected the allegations.

“There is nothing nutritional about possible pyramid schemes that promise financial benefit but result in economic ruin for vulnerable families,” said Markey, a member of the Commerce, Science and Transportation Committee. “Herbalife may be a purveyor of health and wellness products, but some of its distributors are suffering serious economic ill-health as a result of their involvement in the company. I have serious questions about the business practices of Herbalife and their impact on my constituents, and I look forward to receiving responses to my inquiries.”

Herbalife, which operates out of headquarters in downtown Los Angeles, has defended its practices, saying all compensation of distributors is based on sales, not recruiting. The company said its model is legal and similar to many other U.S. companies.

"We received the letter from Sen. Markey this morning and look forward to an opportunity to introduce the company to him and address his concerns at his earliest convenience," Herbalife spokeswoman Barb Henderson said in an email Thursday.

Herbalife has previously disclosed that it was cooperating with an inquiry by the SEC. Members of special interest groups have also said they spoke to the FTC about their concerns.

Markey said he decided to write the SEC and FTC "after hearing serious complaints of improper pressure and financial hardship, including from a constituent in Massachusetts who lost her entire retirement savings."

One family in Norton, Mass., reported that it lost $130,000, including its entire 401(k), investing in Herbalife, Markey said. 

"This compensation system appears to strongly favor distributors who focus on selling to other distributors rather than the general public, a common feature of pyramid schemes," Markey said in a news release. "Concerns also have been expressed that Herbalife aggressively markets its business opportunities to lower-income and vulnerable communities, many of whom are at greater risk if they invest their savings in business ventures that have little potential to turn a profit."

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