(Corrects Monica Vaca's title in the fourth paragraph.)

It’s been a wild ride lately for Herbalife (HLF). The multilevel marketing company is the subject of a battle by such hedge fund titans as Bill Ackman and Dan Loeb. Ackman and his camp assert Herbalife is a pyramid scheme that should be shut down by the government. Loeb and others, cognizant of how past crackdown efforts have failed, are now buying Herbalife stock, betting it will survive the challenge brought by Ackman, founder of Pershing Square Capital Management, who has sold 20 million shares short.

The fight pushes the Federal Trade Commission into the spotlight. The agency offers consumer guidelines to determine the legitimacy of businesses within the $28.5 billion multilevel marketing industry, which use independent sellers to pitch products like weight-loss shakes, vitamins, and household items. But the agency doesn’t have any specific regulations in place for the industry. It says the public would be better protected by law enforcement actions against fraudulent outfits rather than regulating the industry as a whole.

In practice that means people considering buying in have to figure out on their own whether they’ll earn most of their money from recruiting more people to participate, or by selling product to the public. (From the agency: “If the money you make is based on your sales to the public, it may be a legitimate multilevel marketing plan. If the money you make is based on the number of people you recruit and your sales to them, it’s not. It’s a pyramid scheme.”)

Over the past few years, the FTC was working on a new rule to require Herbalife and other multilevel marketers to provide prospective sellers a one-pager that includes support for earnings claims, a list of previous legal actions against the firm, and its cancellation or refund policy. After a firestorm of objections, the agency excluded multilevel marketers, citing an internal study it commissioned that concluded “the rule would not work very well with the MLM business model,” according to Monica Vaca, assistant director of the FTC’s Division of Marketing Practices.

What gets lost in the noise about the hedge fund scuffle is the pain of ordinary people (IBOs, or Independent Business Owners, in industry parlance) who have been burned. Nicole Lopez, who joined Herbalife in June 2005, hoped to earn enough to quit her day job in Provo, Utah, and work from home while raising her 2-year-old son. Instead, she quickly ran through friends and neighbors to sell to and sign up as salespeople.

Under pressure to continue purchasing inventory on a monthly basis or lose her status as an active distributor, Lopez wound up charging almost $9,000 in Herbalife products and sales training materials. Rather than getting more time with her family, Lopez took a second job to pay off the credit-card debt, which ultimately took her seven years. “I followed the plan and it didn’t work,” she wrote in a letter to the FTC. Her tale is similar to myriad hard luck stories, and critics’ studies—which the industry disputes—show turnover is huge and more than 90 percent of distributors either break even or lose money.

Many of the top multilevel marketing companies are well-connected politically and boast endorsements from sports stars, business leaders, and national figures like former Secretary of State Madeleine Albright. Three lawyers who lobbied against the FTC regulations on behalf of multilevel marketing companies formerly served in high-level positions at the FTC, though the agency denied that their efforts got special consideration.

D.A. Davidson analyst Timothy Ramey, who has a buy rating on Herbalife, told Bloomberg TV, “If Herbalife is illegal, they are all kind of all illegal.” There are “15.6 million people practicing this in the U.S.—one out of every seven households,” he said.

Those who are betting long on Herbalife know that, and they probably know something else: What multilevel marketing companies are really selling is hope, something most people are eager to buy.

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