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Greenberg: Nu Skin's New China Headache?

SAN DIEGO (TheStreet) -- Nu Skin (NUS - Get Report) is trading lower today on the heels of what appears to be an investigative story in the People's Daily, the Communist Party's main mouthpiece, suggesting that Nu Skin's China operations are a pyramid scheme. The piece is not on the paper's English language site, but I've confirmed it's legitimacy.

Multi-level marketers are tightly regulated in China, where multi-level marketing as practiced in the U.S. is prohibited.

Here's the piece: If you open it in Google, just hit "translate." It's a crude translation. Crux of the story: The reporter found multiple instances of misleading advertising and marketing business practices.

My favorite passage:

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Southwest University of Politics and Law Lecturer Hu Jiang believes that such acts alleged mind control, commonly known as "brainwashing." Through the implementation of brainwashing, team members will gradually change as well as the negative of the original self-awareness and social awareness, values ​​and code of conduct accepted organizers propaganda. In particular, he stressed that as a member of the loss of self-awareness and social awareness, the organizers claimed that the "freedom of choice" is just an excuse to evade legal sanctions.

In response to my query regarding the story, Nu Skin Corporate Communications Director Kara Schneck said:

The article contains inaccuracies and exaggerations that are not representative of our business in China. The publication did not request any information from Nu Skin nor did it attempt to verify any information that it has since reported as fact.

We are dedicated to operating in full compliance with applicable regulations as interpreted and enforced by the government of China. Nu Skin has an 11-year history of doing business in China under these regulations, and the government has regularly reviewed our business activities. Nu Skin has received direct selling licenses to operate in various provinces and municipalities in China. The most recent government licensure in July expanded our direct selling footprint to include 19 of the country's 32 provinces and municipalities.

We actively educate our sales force to follow all regulations and company policies and procedures. Any member of our sales force not operating in accordance with local law or with our company policies is subject to discipline.

Controversy over Nu Skin's China operations is nothing new. Citron Research was the first to publicly question the China operations. 

Reality: If China authorities ever go after Nu Skin, the "guilt by association" isn't likely to bode well for other multi-level marketers operating there -- no matter how much within the lines they believe they operate. Trouble is, even if they genuinely have the rules and regs in place, the multi-level marketers can't control ethics and compliance of tens of thousands of distributors in far-flung places. Nature of the, uh, beast.

-- Written by Herb Greenberg in San Diego

Herb Greenberg, editor of Herb Greenberg's Reality Check, is a contributor to CNBC. He does not own shares, short or trade shares in an individual corporate security.


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