Pyramid Scheme
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SUMMARY: Nu Skin Enterprises Inc. said Chinese regulators levied $540,000 in fines and penalties against the direct marketer following a review of the company's sales and promotional practices. The regulators said certain products were permitted for sale in retail stores but weren't registered for the direct-selling channel. Nu Skin China also was fined $16,000 for product claims that were deemed to lack sufficient documentation. Shares surged, topping $97 a share in the first few minutes of trading, on investor relief that the penalty wasn't higher. The stock had approached $140 a share in January before tumbling after the Chinese agencies disclosed plans for the probe. Nu Skin, which makes anti-aging skin-care products, came under scrutiny after the Communist Party's main propaganda organ, the People's Daily newspaper, alleged the company was operating as an illegal pyramid scheme in China. The relatively light penalty also buoyed shares of Herbalife Ltd., which is facing scrutiny over its sales practices in China. Herbalife separately disclosed plans to nominate three more designees of activist investor Carl Icahn to its board. Like other foreign companies in China, Nu Skin sells its products through distributors. But Chinese officials have long been skeptical of multilevel marketing, in which distributors earn money from other distributors they bring into the business as well as from what they sell themselves. The company said it understands that six of its sales employees have been fined a combined $241,000 for alleged unauthorized promotional activities. Nu Skin's business in China also was asked to enhance the education and supervision of sales representatives. The company said it is correcting the issues raised by regulators and isn't aware of any other material investigations pending in China
QUESTIONS:
1. With only a $540,000 fine, would you consider Nu Skin's transitions worthy of a plunge of its stock price to almost half?
2. Why is it so difficult for regulators in the mass media to separate multilevel compensation methods from pyramid schemes?
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Nu Skin's transitions are worthy of a plunge in the stock price to half even though the fine is only $540,000. The reason for the plunge is that the fine has conveyed to investors that Nu Skin is carrying out a pyramid scheme. This implies that the revenues of Nu Skin are inflated. Further, it also indicates that the business model of Nu Skin is not very sound. Further, ...
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