Shares of Nu Skin Enterprises Inc (NUS.N) fell as much as 12 percent after short-seller Citron Research published a report alleging that the personal-care products maker was operating an illegal multi-level marketing scheme in China.
Citron, run by California-based investor and notable short-seller Andrew Left, alleged on its website Tuesday that Nu Skin's direct-selling business in China was actually "pyramid-selling" and was illegal under Chinese law.
"We believe they violate laws regulating direct selling, as well as the prohibition on pyramid sales, specifically by supporting the creation of a multi-level pyramid compensation scheme, as well as (by) requiring purchases in order to participate in sales commissions or salary," Citron said.
Nu Skin said in a statement that its China operations were in compliance with local regulations and noted that the government had issued it new direct selling licenses in several territories over the past year.
The company acknowledged that its business model in China differed from its global model, but said its compensation policies were similar to other direct selling companies operating in the country.
"Nu Skin has been doing business in China for eight years and the government has regularly reviewed the company's business activities," the company said.
Citron is known for publishing reports that target companies by revealing what it claims are financial irregularities. Last year, U.S.-listed Chinese company Harbin Electric took itself private after battling Citron's fraud allegations for a year.
The investment firm sometimes hold short positions in stocks profiled by the firm, and they do not disclose when trades are initiated or closed.
Nu Skin has been growing in China, now its largest revenue contributor, and other emerging markets. Sales in Greater China more than doubled to $199.7 million in its last reported quarter, representing a third of total sales.
Last month, the company raised its 2012 profit outlook for the fourth time after it reported better-than-expected quarterly results boosted by strong sales of its ageLOC anti-aging product.
Nu Skin shares closed down 9 percent at $44.36 on Tuesday on the New York Stock Exchange.
(Reporting by Ranjita Ganesan; Editing by Anthony Kurian)