Throughout most of its 33 years of existence, Herbalife has been vexed by a simple question: Is this company really just a pyramid scheme?

It’s incredible, but that question has never been fully answered.

I mean, Herbalife is now a big company with a market cap of more than $6 billion, and earlier this year the Business Journal named Herbalife – once again – as the most profitable public company in all of Los Angeles County. And still we don’t really know if Herbalife is a pyramid.

I used the word “incredible” but it may be more like astounding – pick your own amped-up word – since there have been literally billions of dollars made and lost over the last year by those betting on the question of whether Herbalife is a big pyramid scheme. By savvy and experienced gazillionaires, no less.

Although the pyramid question kept popping up around Herbalife over the years, the whole matter finally seemed to be coming to a head a year ago when hedge fund operator Bill Ackman said he was shorting the stock. He set out a three-hour explanation of why he believed Herbalife was a pyramid scheme. He eventually bet a total of $1 billion or more that Herbalife would collapse.

But some heavyweights came to Herbalife’s defense, notably Carl Icahn and, to a lesser extent, George Soros. “Pshaw,” Icahn essentially said. Ackman just doesn’t understand the multilevel marketing arrangement. Icahn and other investors bet hundreds of millions of dollars by going long on Herbalife’s stock.

Since early this year, Herbalife’s stock has doubled, creating $3 billion in wealth for those who went long on the stock. The shorts have had their heads handed to them. One observer calculated that Ackman alone has lost $400 million, although he remains a resolute anti-Herbalife guy.

This kind of multibillion dollar tug-of-war is something not seen before. And amazingly, it’s lingered over the past year without that simple question – the query that’s at the heart of this fight – having been answered or even addressed in an official way.

That question would disappear if it could be shown that Herbalife’s products are mainly sold to end users for consumption. But critics say that Herbalife can’t make that question go poof because, they claim, Herbalife mainly sells its stuff in bulk to new recruits who aren’t highly motivated to sell products retail but are motivated to sign up new recruits to sell for them. And those new recruits don’t intend to sell retail but intend to sign up new recruits to sell for them. In other words, the critics allege, the whole company is designed not to sell products but to enlist recruits who buy Herbalife’s starter pack of products that sit in their garages. And that makes Herbalife a pyramid, they opine.

But defenders point out that while the churn rate is indeed high – more than 90 percent – and most distributors don’t make much money, that’s just the way multilevel marketing companies tend to work.

(If you want to read some lively and mostly informed essays on both sides of the big question surrounding Herbalife’s legitimacy, go to SeekingAlpha.com.)

But now maybe, just maybe, the pyramid question finally will be answered. There’s a lawsuit wending its way through court and the judge last month allowed the pyramid question to be addressed as part of the case. The suit itself may not have much effect on the company’s fate, but if the outcome goes against Herbalife, it could give federal regulators an impetus to dig in to the question. If the outcome favors Herbalife, it could be one more victory that the company could tout – and a demoralizing defeat for the short sellers.

And, as you can read in the article on page 1 of this issue, Ackman is set to make another big presentation this week. Many of his supporters believe he’ll drop some bombshells of new allegations. If he does so, that could spur regulators to act.

If he fails, well, that would be another defeat for the shorts. Herbalife could ask: What more do you need? We took the heavy hit from Ackman, and we’re the one still standing.

Either way, it’s time to get this simple question answered.

Charles Crumpley is editor of the Business Journal. He can be reached at ccrumpley@labusinessjournal.com

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