Nu Skin and the short-sellers by Peter Elkind @FortuneMagazine October 26, 2012, 9:00 PM EDT E-mail Tweet Facebook Google Plus Linkedin Share icons FORTUNE — “Has anybody seen our stock price lately? How high did we trade today? Anybody know?” Truman Hunt, the impeccably groomed CEO of Nu Skin Enterprises NUS , a multilevel-marketing merchant of skin creams and nutritional products, was playing the tease. Spotlighted at center stage in the Utah Jazz’s Salt Lake City arena in late October a year ago, Hunt was evangelizing to 13,000 rapt distributors at Nu Skin’s biennial convention. Everything was clicking for the company. Revenue and profits were soaring, thanks to what Nu Skin calls a “revolutionary” new “super-class” of anti-aging products it claims can arrest the ravages of time. The company’s chief scientific officer had gone so far as to proclaim them a “fountain of youth.” Even Nu Skin’s stock, which had traded below its 1996 IPO price for nearly its entire existence, had finally taken off, rising more than 500% in less than three years. “Today we traded over $50!” Hunt exulted. Holding up a hand to hush the roaring crowd, he added, “Now, don’t get too used to that number because we’re going to be there very briefly on our road to $150!” It was an extraordinary bit of hype, and hubris, from a CEO. And as moments of hubris sometimes are, it was followed by a series of events — alternately ominous and absurd — that have quickly taken Nu Skin from a roaring business success on a sharply upward trajectory to a company whose future looks considerably murkier. MORE: Avon — the rise and fall of a beauty icon The threat was easy to laugh off initially because it arrived in the chiseled forms of two angry former trophy husbands of Nu Skin co-founder Sandie Tillotson, 56. One is an ex-stripper with the stage name Dirty Dalton, who favored a 20-foot bullwhip as his principal accouterment; the other, a 6-foot-7 Dutch model, B-movie actor, and Arnold Schwarzenegger impersonator. Both men are promoting scathing memoirs, alleging unsavory behavior by Tillotson and the company. Tillotson resigned from Nu Skin’s board in May but remains a senior vice president. She has fought back ferociously, attempting to have one ex thrown in jail and smacking the other with a $60 million lawsuit. All of that would have been just a mortifying sideshow were the B-movie actor not in league with a band of investors betting on the decline of Nu Skin’s stock. For months now, short-sellers have been circling, casting a harsh spotlight on the company’s practices and product claims, which have landed it in trouble before. Company shares have slipped from a 12-month high of $62 and settled near $44. If that weren’t enough, the feds have gotten interested lately in the puffery of Nu Skin’s competitors. In September and October, respectively, the Food and Drug Administration sent warning letters regarding claims about anti-aging skin-care products made by L’Oréal and Avon AVP . In case Nu Skin wasn’t on the FDA’s radar, a short-seller helpfully wrote the agency and suggested it scrutinize Nu Skin too. This simply isn’t a moment when the company can avoid being noticed. Its ties to a number of politicians with Mormon or Utah pedigrees, including presidential nominee Mitt Romney, have brought further attention recently. Nu Skin is a paradox, an enterprise that purports to have a higher calling even as it makes breathtaking claims for what are known in the industry as “lotions and potions,” and dangles dreams of lucre for those who sell its products. Similarly, the personal peccadilloes of one or more of its founders provide a stark contrast to the wholesome image the company tries to convey. At root, though, the story of Nu Skin is one of a striking ascent, a precipitous fall, and an even more dramatic comeback. Will a company that has managed to rise twice now tumble a second time? Multilevel marketing has long battled a reputation as sleazy, given to bogus claims about overpriced products and the easy fortunes that can be made. But Nu Skin has always presented itself as different. When it was founded in 1984, it promised “all of the good and none of the bad.” Its leaders aspired to become “the IBM” of its industry, establishing a “gold standard” for professionalism. It maintains the same stance today, with its slogan, “The difference. Demonstrated.” “We welcome objective evaluation of our business,” says CEO Hunt, 53, during a lengthy interview in the boardroom at Nu Skin’s 10-story glass tower in downtown Provo, Utah. “We’re passionately interested in ensuring that our products and our product claims are appropriate.” Hunt has a certain glow these days, but it’s hard to tell whether it’s his emollient (he’s a loyal user of Nu Skin products) or the company’s recent prosperity. The company is on track for 2012 revenue of $2 billion, 85% of it from overseas. About half its sales come from cosmetics, toiletries, lotions, and creams sold under the Nu Skin label. Nutritional supplements, marketed under the name of its Pharmanex division, account for the rest. Like other MLMs, Nu Skin generally doesn’t offer its merchandise in stores. It relies on armies of independent salespeople, whom it calls distributors. For a $25 sign-up fee, they can buy at wholesale and pocket the markup on anything they sell. But their only chance at achieving a full-time income is to recruit other distributors and get a slice of their sales. These recruits, in turn, must sign up more sellers, and on and on. Distributors actually make up much of Nu Skin’s customer base. To qualify for multilevel commissions, they must purchase or sell at least $100 of its merchandise every month; they and their recruits must collectively generate at least $2,000 in monthly sales. A handful have made fabulous sums: 34 distributors have made $20 million or more in lifetime commissions, the company says. But far more lose money after their personal purchases, or make piddling amounts. Just 12.7% of active U.S. distributors received any commission check in 2011, according to company disclosures; those who did averaged $931 a month. Hunt offers his own gloss on the long odds. “Not everyone comes into this business to generate tens of thousands of dollars in income. Some people do this business to be able to pay for a child’s summer camp or buy a few extra presents at Christmastime. Success for them is a few hundred dollars a month, perhaps.” He acknowledges it isn’t easy to earn a large income, but insists, “This is still one of the lowest-risk business propositions there is out there.” MORE: The Ellen Pao and Buddy Fletcher affair Keeping distributors energized (and buying) is crucial, and that was on full display at the giant Salt Lake pep rally last year, where Hunt compared Nu Skin to the hottest company on the planet. “One investor said this about us,” he declared. Nu Skin “‘is the Apple of anti-aging companies.'” The crowd cheered and the quotation flashed on videoscreens around the arena, where it was attributed to “MotleyFool.com.” Many of those distributors would go home and plaster this endorsement on their own websites. Left unmentioned: The comment originally appeared on one of more than 16,000 Motley Fool message boards, written by an anonymous poster who called himself “slamdunk10.” No matter. At the convention, Nu Skin announced that its distributors had ordered a record $100 million in new products introduced during the event. There’s an old joke in the direct-selling business: MLM stands for “Mormons losing money.” It’s no coincidence that Latter-day Saints have a reputation as having a particular affinity for direct selling. Their missionary work, which requires knocking on doors, spreading a message, and recruiting followers, often in foreign countries, offers perfect training. Nu Skin itself is an insular organization dominated by faith and family, blending the evangelical and the commercial. Top executives hold prominent positions in the Mormon church. Myriad relatives of the company’s founders have played key roles. Co-founders Tillotson, Blake Roney, and Steve Lund have each amassed fortunes in excess of $100 million, both from huge holdings in the company’s stock and from some advantageous transactions. For years, the three owned Nu Skin’s headquarters building and distribution center, receiving lease payments, before selling them to the company last year for $33 million. (A spokesperson says the arrangements were approved by independent board members.) The company’s mission statement speaks of being “a force for good.” But Nu Skin also celebrates wealth, a duality seen in Mormon theology. That mix is visible in its philanthropic endeavors. For example, the company’s Nourish the Children program pays distributors commissions — just as it would on orders for hand lotion — for each bag of porridge mix they order to feed starving children in Malawi. (The company says the program has distributed 277 million meals.) Notes the company’s executive chairman, Steve Lund: “This is not a charity. This is social entrepreneurism.” Charity was not what first brought Nu Skin to media notoriety. Back in 1991, the seven-year-old company was taking off. Annual sales had multiplied to $500 million. Management was talking about reaching $10 billion in just a decade. The distributor force had grown to 100,000. Nu Skin’s luck turned that July, when ABC’s Nightline broadcast a devastating exposé on the company. Ex-distributors complained they’d been lured into a game with little chance of success; some had thousands of dollars of unsold product in their basements. Asked host Barbara Walters: “Is Nu Skin nothing but a scheme promising the American dream while for many delivering only the nightmare?” Attorneys general for a half-dozen states pounced; those in Michigan and Connecticut accused Nu Skin of an illegal pyramid scheme. The company settled its state problems for modest sums, revising a few practices and establishing a more generous return policy for unsold goods. Then the Federal Trade Commission charged the company and three top distributors with making bogus claims about a hair-loss product (“baldness is conquered”); a wrinkle cream (“can roll 10 years off”); and a skin treatment that claimed to heal third-degree burns (“all the skin came back in less than 90 days”). In each case the products were marketed with before-and-after photos, references to scientific studies, and passionate testimonials. The products couldn’t do any of those miraculous things, the FTC charged. The agency also cited “deceptive” boasts of earnings. “If you’re not earning $10,000 a month or more We Need To Talk!” screamed one flier. In fact, the FTC charged, “only a very small percentage of distributors have earned more than a small monthly income.” In 1994, Nu Skin settled for $1.2 million without admitting wrongdoing. The company agreed not to make product claims without “competent and reliable scientific evidence” and to provide fuller disclosure of distributors’ true prospects. But the problems continued. Three years later the FTC fined the company another $1.5 million for making false claims about its weight-loss products. The impact was disastrous. Nu Skin’s sales force ran for the hills. Its American business collapsed. The company tried to adjust, establishing new divisions that sold products without the tarnished Nu Skin name, including nutritional supplements. But wary of more regulatory troubles, the legal staff tightened the reins on product claims, prompting distributors to gripe about “the sales-prevention department.” The company needed a catalyst. MORE: Barry Minkow — all-American con man Nu Skin found its salvation abroad. It had moved aggressively into new markets — especially in Japan, which rapidly became the company’s biggest territory. As that was happening, Nu Skin began cultivating a powerful U.S. network of political connections. It named two retired U.S. senators to its board. Utah Sen. Orrin Hatch in 1994 sponsored a wide-ranging law that deregulated the nutritional-supplement industry, allowing it to sell products without prior FDA review. (In 1998, after the law passed, Nu Skin greatly expanded its supplement business by buying Pharmanex.) Jon Huntsman, then Utah’s governor and later a presidential candidate, led a trade mission with Nu Skin officials to China that helped open up what is now the company’s fastest-growing market. In more recent years, its onetime PR man, Jason Chaffetz, won election to the U.S. House of Representatives. Nu Skin and its industry have been campaign contributors to all three men. Nu Skin also has long-standing ties to Republican presidential nominee Mitt Romney. In 1999 the company was among the first corporate backers of the Romney-led Winter Olympic Games in Salt Lake City. Sponsorship by a supplement company was controversial at a moment when the International Olympic Committee was warning athletes to avoid supplements, since they might contain banned substances. But Romney defended Nu Skin after it submitted its products to independent review. He told the Salt Lake Tribune: “This is the model of testing and labeling we would like other nutritional-supplement companies to adopt.” Romney appeared at Nu Skin’s convention in 1999, according to the Deseret News, offering an endorsement. Both Nu Skin and the Olympics, he said, are “about taking control of your life and managing your own destiny.” The $20 million sponsorship allowed Nu Skin to put the Olympic rings on its products and marketing materials. The value of the affiliation, then-CEO Lund said at the time, was “almost incalculable.” Romney has remained a favorite among Nu Skin executives. Blake Roney co-chaired his national finance committee in 2008. Sandie Tillotson hosted a fundraiser. In the current campaign Steve Lund and his wife donated $3 million to Restore Our Future, a Romney-backing super-PAC, and was a Romney delegate at the Republican National Convention. “Mitt Romney is a pretty close friend,” says Lund. “We have been in his house many times. He and Ann had Thanksgiving at our house one year. I have a huge respect for this guy.” (A Romney spokesperson didn’t respond to a request for comment.) By the mid-’00s Nu Skin had accumulated a collection of products that helped revive the company. One was the Galvanic Spa, a $290 handheld device that emits a mild electrical current, promoted as enhancing the absorption of Nu Skin facial gels. Another was the BioPhotonic Scanner, which measures the body’s level of carotenoids, antioxidants found in fruits and vegetables. The scanner generates a score that is used to encourage the purchase of daily LifePak Nano vitamins at $152 a month. The distributors also typically charge $20 a scan. When customers return a few months later, a higher score serves as validation that the vitamins are working. But revenues plateaued. So in 2005, Nu Skin embarked on a multiyear restructuring. Executives engaged in considerable soul-searching. Most of all, they agreed, Nu Skin needed to find a single differentiating focus. The answer, ultimately, was ageLOC. It would offer one clear concept, which could drive sales of lucrative products for both skin care (ageLOC Future Serum sells for $200 an ounce) and nutritionals (a month’s supply of ageLOC Vitality will set you back $64). The story goes like this: ageLOC products can “reset” genes that affect aging, transforming them back to “a more youthful state.” Once the company embraced the concept, it amped up the hype to maximum intensity. The promised effects for various products are nothing short of miraculous: fewer wrinkles, more elastic skin, less arm flab, a sharper mind, increased energy and libido. If you believe Nu Skin, ageLOC sounds quite extraordinary: “revolutionary,” “a fountain of youth,” “the answer to anti-aging.” Chief scientific officer Joseph Chang put it this way in a presentation: “Based on my own 30 years of drug and supplement-product experience, ageLOC science is the biggest scientific breakthrough that I have ever seen.” All manner of persuasion is marshaled to make that case: scientific studies, heartfelt testimonials, before-and-after photos. A video depicts two elderly mice — one barely mobile, the other strikingly vigorous after being fed ageLOC. “Which mouse would you rather be?” the video asks. Most of all, there’s the company’s bid for scientific credibility, in the persons of University of Wisconsin professors Richard Weindruch and Tomas Prolla. Nu Skin began collaborating with their biotech company three years ago, then bought it last year for $11.7 million. Now the professors are featured in Nu Skin materials touting “ageLOC science” — even for stuff they’ve had nothing to do with. Weindruch became an anti-aging eminence by studying the effects of low-calorie diets on monkeys. He found that monkeys on a diet with 30% fewer calories than normal lived longer and healthier lives. (A new simian study found no life-extending effects.) Because few humans are amenable to caloric restriction, scientists have sought an ingredient that replicates those effects. Weindruch and Prolla identified groups of mice genes that change with age, and antioxidants that counteract some of those changes. It’s this work that Nu Skin now claims as the foundation of ageLOC. Experts in the science of aging deride Nu Skin’s claims. “If someone tells you they know what the mechanism of aging is, they are trying to kid you,” says University of Michigan Medical School professor Richard Miller, who heads a team evaluating anti-aging drugs and nutritional supplements for the National Institute on Aging. Reversing age-related gene expression in mice is several steps removed from proving anything about humans, he says, much less evidence that a substance will work on people. “You can’t just point to some gene-expression stuff and say, ‘This is just as good as studying the effect of my drug.'” (In August, Nu Skin was forced to remove references to a “collaboration” with a Stanford professor after he protested; he calls its ageLOC claims “science fiction.”) Nu Skin’s Chang says the company conducts “the appropriate efficacy studies.” Weindruch is more circumspect, noting his role has been limited to gene-expression studies; he doesn’t review marketing claims. He says he believes Nu Skin is “committed to scientific substance.” AgeLOC is undeniably miraculous in one regard: It has reset the genes of Nu Skin itself. Since introducing the first ageLOC product in late 2008, revenue has taken off and profits have more than doubled. AgeLOC is already a $1 billion brand, and Nu Skin is betting its future on it. The brand energized Nu Skin’s stock, propelling it from a low of $8 in 2009 to an all-time high of $62 in March. Then the whispers started. The Indago Group, a research firm that caters to hedge funds taking short positions, had begun poking around, preparing a “confidential project proposal” to see whether clients wanted to fund a deeper investigation into Nu Skin. MORE: Does NYC top cop Ray Kelly have the world’s toughest job? A cloud was beginning to form over MLMs that sell nutritional supplements. Indago had recently completed a big report on Herbalife HL , a rival MLM that sells weight-loss and nutrition products. During a May 1 Herbalife earnings call, feared short-seller David Einhorn asked a few questions of the sort that would be posed by someone suspecting a pyramid scheme. Herbalife shares plummeted. And though Einhorn didn’t say a word about Nu Skin, its stock fell too. Blood was in the water, and soon other short-sellers swam into view. In August one of them, Andrew Left of Citron Research, began posting online reports attacking Nu Skin. He assailed its practices in China, where multilevel marketing is banned. (Nu Skin operates more like a traditional retailer there, with stores as well as licensed direct sellers who receive a salary and commission.) Left cited accounts from “undercover customers” who reported that Nu Skin employees promoted a pyramid-sales model to them. He accused Nu Skin of “grossly violating” the Chinese ban. Another short-seller later uncovered a video on a Chinese website in which a person identified as a Nu Skin sales director and doctor told a packed auditorium that the company’s products cure cancer. (Nu Skin says the claims were not approved by the company and it has taken “prompt steps to educate and discipline the physician involved.”) Left has raised the specter that the Chinese government will crack down on Nu Skin. Counters CEO Hunt: “Our view is our operations are in compliance with the laws and regulations as they are being interpreted and enforced in China.” Alas, wild claims and short-sellers aren’t Nu Skin’s only headaches. Diederik van Nederveen pivoted from a stream of calls to his ex-wife to warning Nu Skin’s CEO that he could bring down the company. “They realize I have balls of steel!” says Diederik van Nederveen, who was married to Sandie Tillotson from 1995 to 2000. “I’ve looked death in the eye many times.” With his broad shoulders and square jaw, van Nederveen, 47, still looks and sounds like a B-movie action hero. He has worked, he says, as a yacht captain, an underwear model, a painter, a commodities trader, and an Arnold Schwarzenegger impersonator. Dutch by birth, he says he speaks five languages. Since spring he’s been an annoyance for Nu Skin — and a magnet for its adversaries. He has conferred (in at least one case at an hourly rate) with short-sellers and a plaintiffs lawyer considering a class action. He has set up a website to post chapters of his unfinished memoir, Beyond Skin Deep. By any reasonable measure, van Nederveen’s beef should be strictly personal — with Tillotson, not with Nu Skin. The two met in 1995 during a Nu Skin event at Club Med in Cancún. Months later he and Tillotson were married, with Blake Roney performing the ceremony in his capacity as a Mormon bishop. When van Nederveen divorced Tillotson in 2000, he received $1.4 million, joint custody of their daughter, and $5,000 in monthly child support — small change, he figured, for a woman worth more than $100 million. In 2005, remarried and desperate for money, van Nederveen signed away his custodial rights for $350,000, agreeing not to seek any more money. He says his present rage results from Tillotson’s interference with his visitation privileges. Tillotson declined to speak to Fortune. Her lawyer says she’s been “fully supportive” of her ex-husband’s visitation, even providing a car, airfare, and lodging for his visits. According to Tillotson’s attorney, van Nederveen made dozens of threatening phone calls to Tillotson (which he denies). That prompted her to obtain a stalking injunction in May, barring him from contacting his ex-wife or his daughter. Van Nederveen was also aiming his fury at Nu Skin. He freely acknowledges tormenting the company, leaving more than 20 messages on Hunt’s cellphone, to increase pressure on Tillotson. If he doesn’t get a big settlement, he intends to publish his book, which he insists will be an international sensation worth “at least” $50 million. Nu Skin calls this a shakedown — and van Nederveen hardly resists the characterization. “I’m using it to get a fair arrangement with my ex-wife,” he says. “Of course you can say I’m extorting. But I’m extorting with the truth. There is nothing wrong with that.” He says he now has a higher purpose: to expose Nu Skin’s “hypocrisy and fraud,” including the long odds against distributor success. Tillotson’s third ex-husband, Adam Baker, has also caused a stink. He has written his own book, titled Formerly Filthy Rich: My Scandalous Life With a Billionaire Cougar. It was available as an e-book on Amazon.com for a few days last November, before Tillotson’s lawyers persuaded the bookseller to yank it, citing confidentiality provisions Baker had signed in the divorce. It was subsequently posted on the Internet. Ex-stripper Adam Baker with his then-new wife, Sandie Tillotson, in 2002. She later blocked his tell-all memoir and tried to have him thrown in jail. His book is particularly jarring because of its salacious focus on Tillotson. She is revered by Nu Skin distributors, in part because she embodies the dream of self-made wealth: A former schoolteacher and now a grandmother of seven, Tillotson plays a prominent ambassadorial role, often presiding at functions where distributors are honored. Baker describes his whirlwind life after meeting Tillotson in 2002 at a Salt Lake strip club called Raskals, where he danced as “Dirty Dalton.” Baker was 32 then — 13 years younger than Tillotson. Soon they were hopping about the world to Nu Skin distributor events and her half-dozen homes in Hawaii, New York, and Utah. After they were married, she bought a fighter jet (Baker is a licensed pilot), a helicopter, and a ranch in Oregon. In 2005 they separated, and he filed for divorce two years later. A tortuous fight over property ensued, in which Tillotson largely prevailed. Bitter and nearly broke from legal fees, Baker decided to write a book for revenge and money. The result is a deeply unflattering portrait, filled with harsh physical descriptions and a string of accusations — about sex, drugs, money, and vindictiveness — that would make Lindsay Lohan blush. Through her lawyer, Tillotson denies any impropriety. (Tillotson isn’t the only co-founder with a colorful personal life: Nedra Roney has been married 13 times, has been involved in multiple lawsuits, and pleaded guilty to prescription-drug fraud in 1996. She left the company years ago. Her role as a founder was expunged from Nu Skin’s website.) In May Tillotson sought to have Baker arrested on an outstanding 2009 bench warrant stemming from property disputes in their divorce fight. A Utah judge refused, calling the request “stale in the extreme.” Tillotson sued Baker two months later. She has also sued van Nederveen for $60 million, blaming him for the company’s stock drop and her departure from the Nu Skin board. Hunt called van Nederveen to mediate, while dismissing his criticisms of Nu Skin as “laughable.” That didn’t go over well. “You guys are welcome to fight me, and you will take the company down with you,” van Nederveen replied, in an exchange he recorded and later provided to Fortune. “I guarantee you’ll be out of business in six months! … Bring it on, man!” Van Nederveen may come across as a Conan the Barbarian, bent on cartoonish retribution in the lotions and creams aisle. But because of his conduit to the short-sellers — and through them, perhaps, the regulators — he has inflicted some pain on Nu Skin. Certainly Citron’s Left is optimistic (if that word can be used for a person who makes a living betting on disaster) that regulators in China or the U.S. could begin scrutinizing Nu Skin, with deleterious results for the stock. CEO Hunt professes unconcern. He dismisses the criticisms of Nu Skin as a bunch of mudslinging by unreliable or self-interested parties. He sees the future as radiant. Next year, for example, the company will roll out a whole new ageLOC line: diet products. “Essentially we’re going to reset the gene clusters that have to do with weight loss,” Hunt explained in an earnings call. “The revenue impact is going to be enormous.” He predicts Nu Skin will reach $5 billion in revenue — 2 1/2 times its current figure — by 2020. The regulators may have something to say about that. Then again, there’s one thing that will always exceed sellers’ proclivity for making outlandish claims about recapturing youth and beauty: buyers’ need to believe them. This story is from the November 12, 2012 issue of Fortune.