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Herbalife Ltd (HLF - Snapshot Report) finds itself facing yet another accusation by activist investor Bill Ackman, hedge fund manager of Pershing Square, for operating illegally in China, as per media reports. Shares of this nutritionist company fell 1.16% yesterday after the news.

The billionaire investor told his clients that Herbalife is likely violating multi-level market restrictions in China. Ackman pointed to internal documents obtained from a former employee at Herbalife and argued that the company’s Chinese operations were identical to its business in other countries such as the United States and Mexico. However, this can be risky for Herbalife as Chinese law prohibits any multilevel marketing structure.

Herbalife responded to Ackman and stated that its business model is in compliance with Chinese direct-selling and anti-pyramid regulations. Earlier in Jan 2014, First Financial Daily, a Chinese newspaper, also suspected that Herbalife adopted illegal marketing practices in China. Later in Jan 2014, the Canadian Competition Bureau announced a formal investigation into the pyramid scheme business model complaints against the company, as per a report by the New York Post.

Over the past 14 months, Ackman has been accusing Herbalife of running a pyramid scheme business model. i.e. it employs deceptive marketing practices for improving business. The company was accused of making money by recruiting new sales people and not from its sales.

Ackman made that claim in Dec 2012 when he unveiled a $1 billion short position in the company's shares. Ackman even sent a letter to its investors on Dec 24, 2013 about the improper recruiting methods adopted by Herbalife.

Reportedly, Ackman tried to lobby Congress members to push for an investigation against Herbalife by state and federal regulators, especially the Federal Trade Commission. Such an attempt shows that Ackman is determined to prove the charges. Herbalife, on the other hand, has been denying all the charges and is confident about its operations.

Herbalife is not the only company, which employs sales representatives to sell its products. Other multi-level marketing companies like Nu Skin Enterprises Inc (NUS - Snapshot Report), USANA Health Sciences Inc (USNA - Snapshot Report) and Avon Products Inc (AVP - Analyst Report) also follows the same distribution model.

We appreciate the fact that despite allegations numerous attacks on its multi-level marketing model, the company’s earnings continue to increase. This signals that the stock has potential and will continue to move higher, going ahead.

 Herbalife holds a Zacks Rank #2 (Buy).

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