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TheStreet Open House

Why Herbalife Is a Risk Worth Taking

NEW YORK (TheStreet) -- In life and in business, "innocent until proven guilty" has always been my motto. So despite hedge-fund bear Bill Ackman's claims about Herbalife's (HLF - Get Report) "shenanigans," I wasn't going to rush to judgment.

We now know that the Federal Trade Commission has opened an investigation into Herbalife, which Ackman claims is nothing more than an elaborate pyramid scheme. The company has posted sales of more than $5 billion.

Herbalife stock was trading at about $57.95 at 3:50 p.m., up 1.12% for the day and down 26.33% for the year.

Herbalife, which has been in operation for 34 years, has certainly fooled a lot of people if these allegations are true. The company operates in more than 90 countries and employs almost 4 million direct salespeople. Not to mention, the company has Madeline Albright, among others, as a paid spokesperson.

Herbalife's business -- commonly known as multi-level marketing -- is based on a recruitment system. Salespeople, or "distributors," will build their own distribution system by having people work under them to sell products.

Likewise, new recruits are encouraged to recruit more people. And it goes on and on. In terms of compensation, the commission from each sale trickles upward until it reaches the person at the top -- thus, Ackman's reference to a pyramid.

But pyramid is not inherently a pyramid scheme.

This is the same model used by Primerica (PRI) and Amway. In response to Ackman's claims and the FTC's probe, Herbalife says:

"We welcome the inquiry given the tremendous amount of misinformation in the marketplace, and will cooperate fully with the FTC. We are confident that Herbalife is in compliance with all applicable laws and regulations."

The company continues to stand by its business model and its reputation.

Investors aren't taking chances, however.

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