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 distribution scheme.
FBI agents are also reviewing Herbalife documents obtained from
former distributors, two other sources familiar with the matter
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 denies this.
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.
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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
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 at $51.48.
(Reporting by Svea Herbst-Bayliss and Emily Flitter;
Richard Valdmanis, David Gregorio and Lisa Shumaker)
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