Why Is Herbalife (HLF) Stock Crashing Today?

Shares of nutritional supplement seller Herbalife HLF crashed more than 8% in morning trading Thursday following news that it vastly overstated its worldwide growth last year.

The Los Angeles-based company, which is currently under federal investigation for possibly being a pyramid scheme, announced today that active new members grew 3.4% in 2015, less than half of the previously reported 8.3%.

Herbalife claimed that a database error caused the mistake. The company said “it had limited visibility into the likely rate of change” in a metric plan that it began using last year.

Herbalife sells weight-loss and nutritional supplements through the use of independent salespeople. These salespeople buy Herbalife products in bulk and are free to either consume or sell them.

The controversy surrounds the fact that Herbalife “members” also get a cut on the sales of any new salespeople that they recruit. Activist investor Bill Ackman and his Pershing Square Capital Management fund have claimed that Herbalife is nothing more than a pyramid scheme, which relies on making money by recruiting salespeople rather than actually selling its products.

Nevertheless, Herbalife’s stock has grown over 66% in the last year.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
HERBALIFE LTD (HLF): Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research