Jan. 16 (Bloomberg) -- The Chinese government will investigate the operations of Nu Skin Enterprises Inc. after the People’s Daily said the maker of skin-care and nutritional products is operating a “suspected illegal pyramid scheme.”
The State Administration for Industry and Commerce is treating the allegations seriously and has asked for an immediate investigation, it said in a statement on its website.
“If the situation proves to be true, the commerce department will deal with it according to the law and regulations,” the department said.
Shares of the Provo, Utah-based company plunged 16 percent in New York yesterday, the largest decline since October 2004, after the report by the People’s Daily. The newspaper said Nu Skin brainwashes its trainees and sells 104 products in China, 20 more than the government allows.
Nu Skin said the article “contains inaccuracies and exaggerations that are not representative of our business in China.”
The company has a direct-sales license in China, the newspaper said. In 2012, 20 percent of its sales came from China and Hong Kong. As of July, Nu Skin has the licenses to operate its direct selling network in 19 of the country’s 32 provinces and municipalities.
Network marketers such as Nu Skin “have always been questioned,” causing “outsized share price movements,” Olivia Tong, an analyst at Bank of America Corp., wrote in a note. “There does not seem to be tangible evidence to validate negative claims targeted at the company thus far.”
Tong, based in New York, recommends buying the shares, citing strong cash flow.
Actavis Plc, the second-biggest generic drugmaker by market capitalization, will end its presence in China because of the difficult business climate, Chief Executive Officer Paul Bisaro said. China Central Television last October said Starbucks Corp. was price gouging, the latest in a trend of state media targeting foreign companies for unfair treatment of Chinese consumers.
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