More Drama for Herbalife as Report of FTC Probe Raises More Questions

Andrew Klips  |

Somewhere today, Pershing Square hedge fund manager Bill Ackman is probably smiling as just over a month ago Ackman said that he believes that food supplement and diet aid marketer Herbalife (HLF) is a “pyramid scheme.”

Ackman contests that Herbalife relies on generating revenue and profit by recruiting sales reps, not by actually selling merchandise.  He boldly predicted that the company’s stock would soon be worthless and said he took a $1 billion short position.

On Monday, the New York Post reported that the United States Federal Trade Commission is investigating Herbalife and disclosed that it has about 190 complaints about the company spanning the past seven years.  The newspaper obtained more than 700 pages of documents after requesting access to them under the Freedom of Information Law.  The FTC did not have to provide every piece of information, noted the NY Post, citing its rights to not have to divulge information that it uncovered in its investigation.

Heralife issued a response stating that the report is incorrect and demanded a correction.

"Other than the voluntary dialogue with regulators, which we communicated on our January investor day, we are unaware of any other regulatory interest and/or investigation. We are demanding a correction from the NY Post.

Since its founding in 1980, Herbalife has positively impacted the lives and health of consumers. For a direct selling company of our size, we have had a relatively low number of complaints to the FTC. However, we take every one of them seriously and stand by our record of doing right by our distributors and all consumers of our products." 

Herbalife’s stock – and company for that matter – has been a topic of debate amongst high profile investors such as Ackman, billionaire Daniel Loeb and Carl Icahn.  Ackman’s comments initially sent the stock price diving, but when Loeb, who runs Third Point, a $9-billion hedge fund, chimed-in with a long position shortly after, shares bounced back upward.  Loeb disclosed that he bought an 8.24 percent (8.9 million shares) in Herbalife. Those activities were followed by Ackman and Icahn squaring-off with each other on CNBC with their opposing views of Herbalife.  The heated debate made it perfectly clear that Icahn and Ackerman absolutely do not like each other.

Today’s reports comes on the heels of the Federal Trade Commission and three state attorney generals last week shutting down privately-held, Lexington, Kentucky-based Fortune Hi-Tech Marketing, a seller of health and beauty products, calling it a "global pyramid scheme."

The long and short of it is that shares of Herbalife have been all over the map in the past eight weeks given the debates, allegations and investigation.  Shares gone from $46 in mid-December to as low as $24.24, back to $47 and now back down to hit $31 in that time.  Today’s trading has been emblematic of the volatility; gapping-down at the open to $30.84 and pulling-back up to near $34 just over halfway through the trading day to pare Monday’s losses to about 4 percent.

What’s next appears to be anybody’s guess.

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