BEIJING Jan 16 China's regulators launched
probes into skincare products maker Nu Skin Enterprises Inc
after local media questioned the U.S. company's business
practices, dragging down shares of several retailers that use
similar distribution models.
Nu Skin shares shed a third of their market value by
Thursday afternoon. Shares of nutritional supplements maker
Herbalife Ltd fell 10 percent, while those of USANA
Health Sciences were down 12 percent.
Earlier Thursday, the Xinhua news agency said the State
Administration for Industry and Commerce (SAIC) ordered local
authorities to investigate a report in Communist Party
mouthpiece, the People's Daily, alleging Nu Skin had been
exaggerating its influence and creditworthiness in brochures and
organizing "brainwashing" gatherings.
Short sellers and other critics have accused companies such
as Herbalife, USANA and Nu Skin of running illegal pyramid-type
schemes, questioning their distribution model where distributors
make money not only from their own sales, but also from those by
people they recruit to become distributors themselves.
In 2012, short seller Andrew Left's Citron Research said Nu
Skin's direct-selling business in China was actually
"pyramid-selling" and was illegal under Chinese law.
He accused USANA of the same practices in 2013.
The most publicized attack against a nutritional products
maker and distributor came from activist investor Bill Ackman,
who accused Herbalife in December 2012 of running a pyramid
scheme and took a $1 billion short position in the company.
Short sellers make money when the stock price of a company
drops. They sell borrowed shares in the hope of buying them back
at a lower price and return them to the lender, and gain from
the difference in price.
Xinhua, China's state news agency, quoted on Thursday an
SAIC spokesman as saying the administration would take legal
steps against any violations if the probes showed the media
reports were factual.
"We are aware that Chinese regulators have now initiated
investigations to review issues raised by recent news reports,"
Nu Skin said in a statement later in the day.
Herbalife and USANA could not be immediately reached for
Nu Skin said it started its own review of its China
The company said the investigation could hurt China
revenues, but added that it was too early to say if its previous
forecast would be affected.
The company's sales in Greater China more than tripled to
$464.6 million in its quarter ended Sept. 30. The region
accounted for about half of total sales.
Nu Skin said earlier in the day that the People's Daily
article published on Wednesday contained "inaccuracies and
exaggerations that are not representative of Nu Skin's business
in China." The company said it did not believe "that the article
was the result of any particular government inquiry."
State media took many foreign firms to task last year over
pricing, poor quality and shoddy customer service, including
Starbucks Corp, Apple Inc, Samsung Electronics
, the KFC restaurants of Yum Brands Inc and
British drugmaker GlaxoSmithKline PLC.