There’s a big unknown at the heart of the debate over Herbalife: Regulators have given no indication of what they think about the diet supplement company’s business practices.
Bearish investors like the hedge fund manager William A. Ackman contend that Herbalife acts like a pyramid scheme, dependent on recruiting new members rather than generating new sales. In defense, bullish shareholders and the company points to Herbalife’s decades of profit and growth.
As the two sides duke it out, all eyes are on the main government agency that polices pyramid schemes, the Federal Trade Commission. It has not taken any public action. (Another government agency, the Securities and Exchange Commission, has opened an investigation into Herbalife.)
One piece of data may help clarify how the F.T.C. assesses for pyramid schemes.
In response to a Freedom of Information Act request by The New York Times, the agency released how many consumer complaints were registered against an entity that the F.T.C. recently took strong action against, believing it had some characteristics of a pyramid scheme. This helps outsiders understand the role of consumer complaints in motivating the regulator to act.
In January, the F.T.C., along with some state attorneys general, moved to shut down the Kentucky-based Fortune Hi-Tech Marketing. Before that happened, consumers had registered 156 complaints against Fortune Hi-Tech over about five years, according to material released by the commission. That’s not a high number, given the sort of abuses regulators contended took place and the long period. Yet the relatively low figu! re didn’t seem to stop regulators going after Fortune Hi-Tech.
What does say about the Herbalife situation
The commission also recently released the number of complaints against Herbalife. There were 192 consumer complaints over a roughly similar period registered with the government. That’s more than the amount of complaints against Fortune Hi-Tech, but still a seemingly low figure.
Herbalife’s critics may seize the low number of complaints against Fortune Hi-Tech to bolster their case. They could argue that regulators thought Fortune Hi-Tech might be a pyramid scheme, even though the public didn’t flock to complain about it. As a result, the relatively small number of complaints against Herbalife says little about what the company really does. Often, victims won’t complain for a number of reasons, the critics might add.
Herbalife declined to comment.
But an industry group called the Direct Selling Association weighed in. Joe Mariano, president of the association, sad the substance and nature of the complaints mattered. And this is what the Federal Trade Commission probably takes into account when it looks at companies, he added.
He said his association had a code of ethics that barred its members, including Herbalife, from engaging in pyramid scheme activities. He declined to supply a number of complaints made to the association against Herbalife. Mr. Mariano noted that Fortune Hi-Tech was not a member of the association.
“Herbalife is bound by our self-regulatory code that prohibits pyramid schemes,†he said. “Obviously, they wouldn’t be members of the association if we believed they were in violation.â€
