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Greenberg: More 'Sanctions' Against Nu Skin?

By: Herb Greenberg | 03/19/14 - 09:41 AM EDT

Stocks in this article: NUSHLFUSNA

(This column previously appeared on Herb Greenberg's Reality Check)

SAN DIEGO (TheStreet) -- Here's my quick read of the China disclosures in Nu Skin Enterprises' (NUS) just-published (and delayed) 10- K.

The only thing that really mattered to me was the highlighted line:

"It is currently unclear what impact the adverse publicity and our voluntary actions will have on our business in this market in the longer term or whether these voluntary actions will be effective in addressing concerns of regulators in Mainland China. Regardless, it is likely that we will be fined and could potentially face some other form of sanctions from these regulators."

That the company tells you that it is likely to be fined and that it could face other sanctions is significant. Nu Skin has already said that its audit committee is investigating the situation in China, where Chinese regulators have launched a probe of Nu Skin. Part of what the Chinese are looking at, the company says, is the "structure of our sales organizations and compensation and whether they violate application Chinese regulations."

Now the company snuck in that comment about being fined, and then added that it could face possible sanctions, including "a formal suspension of our ability to recruit new sales people and direct sellers, a temporary suspension of our ability to sell products in various markets or, in the most extreme cases, loss of existing licenses to operate in various jurisdictions in Mainland China."

Reality -- and my interpretation: This company is coming right out and telling you, by way of saying that it is "likely" to be fined, that it knows it has issues. Suggesting there could be more sanctions suggests it may be worse than it appears.

Considering that most of Nu Skin's growth comes from China, the prospect of a crackdown on the way it does business, even if it's just a measly fine, is significant. Nu Skin relies on a continuous stream of new enrollees among its distributors. Just as these enrollees provide a multiplier effect if business is booming, the reverse is true if it isn't. And I'm sticking with my original comment that whatever happens to Nu Skin in China will affect Herbalife (HLF), Usana (USNA) and all other multi-level marketers operating there, fine or no fine. They'll have been forewarned.

-- 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. He can be reached at herbonthestreet@thestreet.com.

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