Shares of Nu Skin (NUS) surged nearly 20% Monday after China announced a minimal fine to the skin care sales and marketing company. Investors had feared a far worse punishment. Shares of fellow multi-level marketer Herbalife (HLF) are up as well as investors shrug off hedge fund honcho Bill Ackman's concerns about similar sales violations.
China's Administration of Industry and Commerce is penalizing Nu Skin only $781,000. The slap on the wrist breaks down like this: $524,000 for the sale of certain products by direct sellers that were not registered appropriately in the country, $16,000 for product claims that were deemed to lack "sufficient documentary support", and $241,000 for unauthorized promotional activities carried out by six Nu Skin employees.
Multi-level marketers like Nu Skin and Herbalife have been criticized because they make their money by selling products to distributors, who in turn sell to other local sales people, rather than the actual end users. For their part, Nu Skin and Herbalife say their business practices are no different from other personal care marketing companies like Avon (AVP).
Nu Skin was attacked in January by the state-run Chinese newspaper People's Daily for using what the paper called "brainwashing" methods to sell its products. The article also said that the company was a pyramid scheme, knocking 20% off shares of the company in a single day. So far this year, shares of Nu Skin are down more than 30%. However, the stock has doubled over the past twelve months.
Herbalife has been in the cross-hairs of Ackman, who brought his fight with the company to China earlier this month. He has already accused Herbalife of violating China's direct-selling laws. Ackman first called the diet shake seller a pyramid scheme more than a year ago when he disclosed a $1 billion bet that the company's stock will fall. So far this year the stock is off more than 30%, but it has shown signs of a rebound this month.
Ackman famously feuded with investor Carl Icahn, who bought Herbalife shares even as Ackman was shorting them. The two had a memorable debate, trading insults on live TV last year. Herbalife announced Monday that it will nominate three more Icahn designees to the company's board at the annual meeting. Icahn and related groups hold nearly 17% of the common shares and already have two seats on the 13 member board.