Herbalife shares drop on report of Canadian inquiry

BOSTON Tue Jan 28, 2014 2:58pm EST

BOSTON Jan 28 (Reuters) - Herbalife shares fell as much as 3.5 percent on Tuesday following a report that Canada's top consumer regulator has launched a formal probe into complaints that the nutrition and weight loss company runs a pyramid scheme.

The New York Post, citing unnamed sources, reported on Tuesday that the Canadian Competition Bureau has interviewed former Herbalife distributors and can now apply for "information gathering orders."

The report comes less than a week after U.S. Senator Edward Markey called on two U.S. regulators, the Securities and Exchange Commission and the Federal Trade Commision, to investigate the company, sending the stock down 15 percent.

A spokesman for the Canadian authority declined to confirm or deny any investigation. A spokeswoman for Herbalife said, "We are unaware of any investigation and have not been contacted."

Herbalife's share price has been a battleground for billionaire investors for more than a year. William Ackman has accused the company of running a pyramid scheme, something Herbalife vehemently denies, and bet $1 billion that its share price will go to zero when regulators shut the company down. On the other side, Carl Icahn and more recently William Stiritz, are big owners who expect the stock price to go up.

Investors following the Herbalife story speculated that Canada may be investigating the generation of sales leads. The company prohibited "lead generation" methods to find new distributors at the end of June, but Ackman, in a letter to investors sent last year, said those practices, promoted by the company's top distributors, are still being used.

Herbalife's Henderson said Canadian sales represent less than 1 percent of total sales.

On Monday, Herbalife's share price climbed 6.7 percent when Stiritz, Herbalife's fourth-largest investor, hired Timothy Ramey, a well-known Herbalife analyst, to work for Post Holdings , the company he runs. Stiritz' investment in Herbalife was made for his private account and had nothing to do with Post, the company said previously. But Ramey, who worked for D.A. Davidson, will be director of strategic ventures at the company Stiritz runs.

Since the start of the year, Herbalife's share price has dropped 22.43 percent which helps shrink the paper loss Ackman's $12 billion Pershing Square Capital Management has sustained on the investment he made public in December 2012.

In late trading on the New York Stock Exchange, Herbalife shares were down 2.7 percent to $62.31. (with additional reporting by Caroline Valetkevitch and Alastair Sharp, Reporting by Svea Herbst-Bayliss; Editing by Nick Zieminski)