(Adds details on Ackman's bet, distributors)
By Emily Flitter and Svea Herbst-Bayliss
NEW YORK/BOSTON, April 11 The U.S. FBI is
probing Herbalife Ltd, the nutrition and weight loss
company that hedge fund manager William Ackman has called a
pyramid scheme, sources familiar with the investigation said on
The news, first reported by the Financial Times, sparked a
sharp sell-off that sent the stock price down nearly 14 percent.
One source briefed on the matter said that the investigation
has been going on for some time, but declined to give further
details. A spokesman for the Federal Bureau of Investigation in
Boston declined to confirm or deny the investigation. So far no
charges have been filed in the matter.
Former Herbalife distributors reached by Reuters said they
had been contacted by agents who were interested in finding out
more about the multilevel marketing company's business
practices, including how it recruits new members into its
FBI agents are also reviewing Herbalife documents obtained
from former distributors, two other sources familiar with the
Herbalife said on Friday that the company has not received
any inquiries from the FBI or the Justice Department about any
investigation. But it would not be unusual for law enforcement
to investigate a company without telling executives about it.
The company has steadfastly denied running a pyramid scheme,
where distributors earn more money for recruiting new members
into the scheme than they do by selling products to consumers.
News of the FBI probe comes roughly a month after Herbalife
confirmed that the Federal Trade Commission had issued a civil
investigative demand to the company to look more closely at how
it works. In January, U.S. Senator Edward Markey called on the
FTC and the Securities and Exchange Commission to investigate
the company, in part because of allegations from civil rights
groups that Herbalife unfairly targets minorities. Herbalife
The company, which reported sales of $4.8 billion last year,
employs a vast network of independent distributors who sell its
powders and shakes in more than 80 countries, including China,
the company's fastest growing market.
For months Herbalife has been a battleground for
heavy-hitting investors. Ackman, who runs $13 billion hedge fund
Pershing Square Capital Management from New York, first called
the company a fraud in December 2012 when he unveiled a $1
billion short position against the company.
Since then, billionaire investors Carl Icahn, George Soros,
Daniel Loeb and William Stiritz have taken the other side of the
bet, helping push the stock price up 138 percent last year.
Their involvement has comforted other investors that Herbalife
will eventually get a clean bill of health, one investor said.
Icahn, Herbalife's biggest shareholder, last month scored
three additional board seats, paving the way for the billionaire
investor to control a total of five seats.
But Ackman is sticking by his forecast that the company's
share price will eventually fall to zero after regulators start
looking at the company more closely. His firm declined to
comment on Friday.
Pershing Square has published dossiers about Herbalife's top
distributors, charging they lure in new recruits with videos
featuring big houses and expensive cars even though company
statistics show that the majority of distributors never earn any
income from Herbalife.
Michael Araujo, a Massachusetts resident who tried to set up
his own Herbalife distribution business for a year after having
been laid off by Bank of America, said his family lost roughly
$85,000 on the scheme. He said he spent about $4,000 a month
buying business leads and purchased $7,000 worth of Herbalife
products. "They target people who are desperate," Araujo said in
a telephone interview, about the company's sales tactics.
Meanwhile Tish Rochin, a distributor in Texas who went from
driving a truck to saying she became a millionaire thanks to
Herbalife, said it is "simple but hard work" to become wealthy
by selling the company's products.
This year Herbalife's stock price has tumbled 34.6 percent,
kicked lower first by news that Senator Markey was involving
himself. Last month news that the FTC opened an investigation
hastened the fall. On Friday, the company's stock price closed
(Reporting by Svea Herbst-Bayliss and Emily Flitter. Editing by
Richard Valdmanis, David Gregorio and Lisa Shumaker)