FTC probe targets Herbalife

Bloomberg NewsMarch 12, 2014 

Herbalife, the nutrition company that hedge fund manager Bill Ackman has accused of being a pyramid scheme, disclosed that the Federal Trade Commission has started a civil probe into its practices.

The company is confident it is in compliance with all laws and will cooperate with the investigation, Cayman Islands-based Herbalife said Wednesday in a statement.

The probe marks an achievement for Ackman, who in 2012 made a $1 billion bet against Herbalife’s shares and started working to persuade regulators to shut the company down, saying it misleads distributors, misrepresents sales figures and sells a commodity product at inflated prices. The company has repeatedly denied Ackman’s allegations and won allies that include billionaire Carl Icahn.

“Herbalife welcomes the inquiry given the tremendous amount of misinformation in the marketplace,” the company said in the statement.

Justin Cole, a spokesman for the FTC, declined to comment. Pershing Square declined to comment.

Herbalife shares fell $4.82, or 7.4 percent, to close at $60.57 on Wednesday.

Sen. Edward Markey, D-Mass., has asked the FTC and the U.S. Securities and Exchange Commission to look into Herbalife’s business practices. An advocacy group called the League of United Latin American Citizens also has met with FTC Chairwoman Edith Ramirez to describe alleged abuses by the company. Ramirez told Markey in a letter last month that his concerns were being “carefully considered.”

Ackman yesterday renewed his attack on Herbalife with a two-hour presentation in which he accused the company’s China business of violating direct-selling laws. Ackman, who has said he’d take his fight against the company “to the end of the Earth,” last year reduced his equity short bet against Herbalife and replaced it with options in a move that he said increases his potential gain from a decline in the shares.

Defending Herbalife has been Icahn, who in early 2013 disclosed he’d taken a stake in the nutrition company and said he would discuss strategic alternatives with its management. Icahn has since increased his investment and is now Herbalife’s largest investor, with a 17 percent holding.

Another Herbalife backer is William Stiritz, the chairman of Raisin Bran maker Post Holdings. He is Herbalife’s fourth-largest shareholder, with about 7.4 percent of the shares.

Herbalife sells its vitamins and meal-replacement shakes through a network of independent distributors, each of which earns revenue and incentives based on product sales by them and distributors they recruit.

In 2012, the company announced plans to revamp a defunct Dell computer manufacturing plant near Winston-Salem that is expected to employ about 500 people within three years. The company could receive nearly $10 million in state and local tax breaks and incentives if it meets its hiring and investment milestones.

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