Congresswoman Linda Sanchez (D-CA) sent a letter to the Federal Trade Commission urging them to investigate Herbalife to see whether or not the nutrition supplements seller is a pyramid scheme.
Herbalife, which is headquartered in California, is the company hedge fund manager Bill Ackman, who runs Pershing Square, is shorting.
Ackman, who is is shorting more than $1 billion worth of Herbalife shares, has publicly called the company a "pyramid scheme" that preys upon lower income people. As a consequence, he believes regulators will be induced to investigate it.
Herbalife has denied his allegations.
Here's a transcript of the letter:
Dear Chairwoman Ramirez:
I am writing to express my concern about the marketing and business practices of Herbalife, Ltd. In particular, I am troubled by allegations that this company may be harming consumers — especially those from our country's most vulnerable populations.
There have been extensive media reports and allegations about Herbalife's business practices. On March 12, 2013, the National Consumers League wrote a letter urging the FTC to conduct an investigation into the possibility that Herbalife is a complex pyramid scheme. More recently, on May 17, 2013, the Hispanic Federation also wrote a letter urging an FTC investigation. Both groups have voiced concerns over whether Herbalife's distributors are primarily incentivized by recruiting others, or by selling the Herbalife product. Additionally, as the National Consumers League letter states, "Low-income consumers, as well as African-Americans and Hispanics, were found to be especially vulnerable to pyramid-schemes masquerading as legitimate home-based business opportunities."
As I have learned more about this issue from my constituents and from outside groups, I believe it is the Federal Trade Commission's (FTC) responsibility to examine these allegations. Given the FTC's mission to investigate claims of fraud and potential pyramid schemes, I encourage you to investigate this matter. I have confidence that such an investigation will provide clarity to consumers and I expect you will aggressively pursue it in a timely manner.
Thank you for your attention to this important matter.
Since December 18, the trading session before Ackman confirmed his short, shares of Herbalife have risen more than 6.5%. The stock has traded in a 52-week range of $24.24 and $56.39.
Ackman's long-time rival billionaire investor Carl Icahn has snapped up a huge stake in the company. Icahn told CNBC he thinks Ackman will be the victim of the "mother of all short squeezes."
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