Herbalife Plunges After Growth Overstated of New Members

On Thursday, Herbalife Ltd plunged on news that it overstated its growth of customers and its distributor bases, which brings another big headache to the company that is facing a federal investigation as to whether it is a pyramid scheme as some have called it.

A metric that is called active new members was up 3.2% globally during the fourth quarter from the same period one year ago, not the increase of 16.7% that was cited on a conference call February 25, said the company, which is based in Los Angeles.

Active new member in the U.S. increased by 30.7% and not the 71% that was mentioned on the same call, said Herbalife. Those two were amongst over 24 instances of statistics that were misstated according the federal filing.

Stock dropped by up to 7.7% in New York, which represented the largest intraday drop since October 7, 2015. Stock at Herbalife had gained 5.1% through Wednesday boosted by the prospect that the investigation was beginning to end.

The announcement might embolden Pershing Square Capital Management owner Bill Ackman, who has shorted company shares and says it is just an illegal pyramid scheme.

Herbalife announced that it discovered the data that was incorrect, which had resulted from errors in the database.

The company started tracking this metric in 2015 in connection with the changes in the marketing plan and reported it first during its 2015 second quarter earnings call.

Herbalife relies on its independent distributors to sell products, which include snack bars, to weight loss shakes to supplements and skin creams.

Many of the distributors in the company are customers as well who sign up as member to receive member discounts on the products they purchase.

While this mistake is quite embarrassing and will certainly raise some suspicions amongst investors who are already skeptical of the business, the actual numbers are not that problematic for the company, announced a market analyst.

The errors will not have any effect on the historical financial statements of the company.

Herbalife, which denied the allegations of Ackman, said in February that it was holding talks with the Federal Trade Commission in the U.S. about the resolving of a probe into whether the business was in fact a pyramid scheme.

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David Glass

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