REFILE-SEC probing hedge funds' bets on Herbalife

Fri May 2, 2014 4:07pm EDT

(Corrects typographical errors in first and second paragraphs)

BOSTON May 1 (Reuters) - The U.S. Securities and Exchange Commission (SEC) is probing whether a number of hedge funds may have acted improperly when they made bets on nutrition and weight loss company Herbalife Ltd last year, a source said.

The regulator is reviewing whether investors may have engaged in market manipulation or failed to properly disclose that they were working as a group when they lined up against billionaire investor William Ackman's short bet against the company, said the person, who is familiar with the investigation but not permitted to discuss it publicly.

A spokesman for the SEC was not immediately available to comment. An official at Herbalife also declined to comment.

The story was first reported by the New York Times.

Ackman publicly announced in December 2012 that his $13.6 billion Pershing Square Capital Management fund had wagered $1 billion short bet, alleging that Herbalife was running a pyramid scheme and that its stock price would eventually drop to zero.

The SEC, the Federal Trade Commission (FTC), several state prosecutors and the Federal Bureau of Investigation (FBI) are looking into these allegations.

A spokeswoman for Pershing Square did not immediately respond to a request for comment.

Herbalife has steadfastly denied running a business where members earn more for recruiting other members into the scheme than for selling its products to retail customers.

But the SEC is now also looking to find information on which hedge fund managers attended a so-called ideas dinner last year and what was said about Herbalife, shortly before a group of funds took long positions in the company. No one has been accused of any wrongdoing.

A short squeeze is a trading scenario that occurs from time to time in heavily shorted stocks, when bearish traders are forced to buy shares to avoid big losses, something that ends up pushing the stock only higher.

Herbalife's stock price shot up 138 percent last year when prominent fund managers, including George Soros' family office, Carl Icahn and Daniel Loeb's Third Point, took the other side of Ackman's bet.

Icahn predicted early in 2013 that Ackman would get caught in the "mother of all short squeezes."

Although they remain on opposite sides of the Herbalife trade and have had testy relations in the past, the men, two of Wall Street's most widely followed activists, forged a truce last week during a telephone call, agreeing to disagree on this matter.

This year Herbalife's stock price has fallen 24 percent and Ackman's fund has gained roughly 20 percent this year, three investors said on Thursday.

(Reporting by Svea Herbst-Bayliss; Editing by Matt Driskill)

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