Herbalife Marketing Practices Said to Be Subject of FBI Probe

Apr 12, 2014 12:01 am ET

April 12 (Bloomberg) -- Herbalife Ltd., the company that hedge fund manager Bill Ackman has accused of being a pyramid scheme, is being probed by the Federal Bureau of Investigation, according to a person familiar with the matter.

Federal authorities are looking into the company’s marketing practices, said the person, who asked not to be identified because the investigation is private. The Financial Times reported the probe yesterday, saying the FBI and the U.S. Attorney’s Office in Manhattan were involved.

Herbalife, which said yesterday it had no knowledge of an FBI or Justice Department probe, has spent more than a year denying Ackman’s accusations that it misleads distributors, misrepresents sales and sells a commodity product at inflated prices. In that time, the company has won allies such as billionaire Carl Icahn, who has become its largest shareholder.

“Not every probe leads to an indictment,” Meredith Adler, an analyst for Barclays Plc in New York, said in an interview. Adler, who recommends buying the shares, said she will wait for more details and developments before forming an opinion.

Shares of Cayman Islands-based Herbalife dropped 14 percent to $51.48 yesterday in New York. That’s the biggest one-day decline since Dec. 21, 2012, the day after Ackman laid out his arguments against the company in a presentation that stretched longer than three hours.

Representatives of Icahn and Ackman didn’t immediately respond to requests for comment. Jim Margolin, a spokesman for Manhattan U.S. Attorney Preet Bharara, declined to comment.

No Requests

Herbalife, which sells vitamins and meal-replacement shakes through a network of independent distributors, said yesterday in a statement that it hasn’t received requests for information from the FBI or the Justice Department.

“Herbalife does not intend to make any additional comments regarding this matter unless and until there are material developments,” the company said.

The company disclosed last month that the Federal Trade Commission had started a civil probe into its practices, something Ackman had sought since his New York-based firm, Pershing Square Capital Management LP, bet $1 billion against Herbalife’s shares.

The FTC had been asked by Senator Edward Markey, a Massachusetts Democrat, to look into Herbalife’s business practices, and an advocacy group called the League of United Latin American Citizens also had met with agency Chairwoman Edith Ramirez to describe alleged abuses by the company.

The New York Times has reported that Ackman had donated $10,000 to the advocacy group and hired a former aide to Markey as part of his anti-Herbalife campaign.

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, which works from an office in Los Angeles. Icahn has since increased his stake to 17 percent, according to data compiled by Bloomberg. Herbalife said last month that it would nominate three board members picked by Icahn.

--With assistance from Leslie Patton in Chicago, Patricia Hurtado in Federal Court in Manhattan and Renee Dudley in New York.