(CNN/Money) Shares of Herbalife (HLF) sank 13% and close down 10% Thursday after U.S. Senator Ed Markey, a Democrat from Massachusetts, said he has called on the Securities and Exchange Commission and the Federal Trade Commission to investigate the nutritional supplements company for running a pyramid scheme after receiving complaints from constituents.
Herbalife is a multi-level marketing company. Its distributors make money by selling Herbalife’s weight loss products and recruiting new members. These distributors take a portion of sales from members they recruit. That is legal.
But the FTC says that multi-level companies would be deemed an illegal pyramid scheme if salespeople sell more products to other distributors rather than to the public or if they make more money from recruiting than they do from selling products. The concern is that lower-level distributors may be stuck with unsold products.