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Ackman praises call for Herbalife investigation; shares drop

Published: 11:05 13 Mar 2013 EDT

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Hedge fund manager William Ackman is praising a consumer group's push for the U.S. Federal Trade Commission (FTC) to investigate whether Herbalife (NYSE:HLF) is a pyramid scheme. Herbalife defended itself by saying the FTC should investigate Ackman.

The National Consumers League (NCL) said it wants the FTC to investigate the claims against Herbalife as well as the nutritional-supplements maker's responses.

Ackman claimed in December that Herbalife, based in the Cayman Islands, was a pyramid scheme and made a bet the stock would fall, arguing that the company makes most of its money by recruiting new salespeople rather than on the products they sell. Herbalife disputed that.

A pyramid scheme is a non-sustainable business model that involves promising participants payment or services, primarily for enrolling other people into the scheme, rather than supplying any real investment or sale of products or services to the public

Herbalife is a network marketing company that sells weight management, nutritional supplement and personal care products. Shares of Herbalife, with a market value of $4.1 billion, slipped as much as 1.8 percent to $39.70 in early trading on Wednesday.   

In a statement late Tuesday, Pershing Square Capital Management's Ackman said he was pleased that the NCL was requesting an FTC investigation and believes it will show that the company is a pyramid scheme.

On Wednesday, Herbalife said in a statement that "We regret that the National Consumers League has permitted itself to be the mechanism by which Pershing Square continues its attack on Herbalife."

The company said that perhaps Ackman's Pershing Square should be investigated, saying "its actions are motivated by a reckless $1 billion bet against the company based on knowingly false statements about Herbalife."

Herbalife maintains that it is a financially strong company that has created an added value for shareholders.

Last month, Herbalife dismissed a media report that it was the target of a law enforcement investigation. At that time, the FTC would not confirm or deny whether any government agency was investigating Herbalife.

The Wall Street Journal had reported in January, citing unidentified sources, that the Securities and Exchange Commission had opened an inquiry into Herbalife.

Herbalife's business has become a point of contention between several prominent Wall Street figures. In December, Ackman made his pyramid scheme allegations and said that he was shorting the stock. Short-sellers make money when the shares they're betting against decline.

Greenlight Capital's David Einhorn, another prominent Wall Street figure, had raised concerns about Herbalife's business back in May.

 

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