New York State Senator accuses Herbalife LTD of “Scam”

Herbalife Ltd (NYSE:HLF) is losing ground yet again. It looks like Bill Ackman’s battle against the nutrition company has gained more support, after a State Senator echoed his claims that it runs on a pyramid scheme. The stock soon came off its earlier session highs after Bloomberg reported the story.

The company faced fresh attacks after New York State Senator, Jeffrey Klein, accused the company of deceiving regulators over its compliance levels. The Senator also held a press event in New York on Friday, where he claimed to have identified more victims betrayed by Herbalife’s alleged scams.

The Senator claims that he has spoken to more than a dozen victims, including one who allegedly lost $100,000. Mr. Klein will introduce legislation that would protect customers and distributors against any illegal business practices, and crack down on Herbalife business operations not compliant with the law. He previously went after the company last October, when he amassed complaints of some 56 alleged victims, who have lost an average of $20,000.

His investigation also looked into more than 50 nutrition clubs owned by the company, that sell its weight loss supplements and shakes. However, he now claims to have found more alleged victims of Herbalife’s distribution practices since October. “They are saying you can achieve the American dream,” he said at the press event. “The only thing that does happen is people lose lots and lots of money,” Bloomberg reported him as saying.

After the Senator revealed his intentions, the negative report overshadowed even the broad market rally yesterday. Shares were up only 2.35% to $57 through Friday’s close, after jumping to as high as $57.5 per share during midday trading.

Besides the New York Senator, the company is battling directly with activist billionaire Bill Ackman, who has waged a war against Herbalife for more than three years. He also contends that the company runs a pyramid scheme. After Mr. Ackman presented his $1 billion short bet against Herbalife, the company had to deal with an investigation by the US Federal Trade Commission, over the authenticity of its business practices.

The stock has improved by a hefty 28.57% over the past one month. However, with negative commentary surrounding the company, option traders bet that this upside is only transient, before the stock continues its downward trail again.

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