China's regulators launched probes into skincare products maker Nu Skin Enterprises Inc after local media questioned the U.S. company's business practices, dragging down shares of several retailers that use similar distribution models.
Nu Skin shares shed a third of their market value by Thursday afternoon. Shares of nutritional supplements maker Herbalife Ltd fell 10 percent, while those of USANA Health Sciences were down 12 percent.
Earlier Thursday, the Xinhua news agency said the State Administration for Industry and Commerce (SAIC) ordered local authorities to investigate a report in Communist Party mouthpiece, the People's Daily, alleging Nu Skin had been exaggerating its influence and creditworthiness in brochures and organizing "brainwashing" gatherings.
Short sellers and other critics have accused companies such as Herbalife, USANA and Nu Skin of running illegal pyramid-type schemes, questioning their distribution model where distributors make money not only from their own sales, but also from those by people they recruit to become distributors themselves.
In 2012, short seller Andrew Left's Citron Research said Nu Skin's direct-selling business in China was actually "pyramid-selling" and was illegal under Chinese law.
He accused USANA of the same practices in 2013.
The most publicized attack against a nutritional products maker and distributor came from activist investor Bill Ackman, who accused Herbalife in December 2012 of running a pyramid scheme and took a $1 billion short position in the company.
Short sellers make money when the stock price of a company drops. They sell borrowed shares in the hope of buying them back at a lower price and return them to the lender, and gain from the difference in price.
Xinhua, China's state news agency, quoted on Thursday an SAIC spokesman as saying the administration would take legal steps against any violations if the probes showed the media reports were factual.
"We are aware that Chinese regulators have now initiated investigations to review issues raised by recent news reports," Nu Skin said in a statement later in the day.
Herbalife and USANA could not be immediately reached for comment.
Nu Skin said it started its own review of its China operations.
The company said the investigation could hurt China revenues, but added that it was too early to say if its previous forecast would be affected.
The company's sales in Greater China more than tripled to $464.6 million in its quarter ended Sept. 30. The region accounted for about half of total sales.
Nu Skin said earlier in the day that the People's Daily article published on Wednesday contained "inaccuracies and exaggerations that are not representative of Nu Skin's business in China." The company said it did not believe "that the article was the result of any particular government inquiry."
State media took many foreign firms to task last year over pricing, poor quality and shoddy customer service, including Starbucks Corp, Apple Inc, Samsung Electronics , the KFC restaurants of Yum Brands Inc and British drugmaker GlaxoSmithKline PLC.