Wednesday, 4 March 2015
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Mar 13 2014 | 12:55pm ET
Fifteen months ago, Pershing Square Capital Management’s William Ackman made a $1 billion prediction that the Federal Trade Commission would find that Herbalife is a pyramid scheme and would shut the company down. Yesterday, the nutritional supplements company announced that the regulator had taken the first step to doing so.
Herbalife disclosed that FTC has launched a civil probe into its business. Of course, the regulator is a long way from doing what Ackman hopes, but the move was some of the first good news the hedge fund manager has gotten since launching his campaign against Herbalife in December 2012.
Herbalife shares dropped sharply after the investigation was announced, cutting Ackman’s huge losses on his $1 billion short. The company’s shares remain up 43% since Ackman leveled his accusations.
The FTC probe follows intense lobbying by both sides. Ackman spent $264,000 last year to make his case on Herbalife, winning the support of Sen. Edward Markey (D-Mass.) and several minority groups, all of which pressed the FTC to launch an investigation. Herbalife, which is supported by Carl Icahn, George Soros and others, responded with a $2 million lobbying blitz.
Ackman’s efforts to win an investigation were chronicled in The New York Times on Sunday, which called his efforts “an extraordinary attempt to leverage the corridors of power… for his hedge fund’s profit.” Herbalife said the article “exposed” Ackman’s “unprecedented campaign to destroy” it “for what it is: a cynical, self-serving attempt to manipulate the market by buying his way into an investigation to cover his own reckless $1 billion bet.”
Yesterday, Herbalife said it “welcomes the inquiry given the tremendous amount of misinformation in the marketplace.”
Word of the probe follows Ackman’s latest accusations against Herbalife, when he said the company was violating direct-selling laws in China.
In a presentation Tuesday, Ackman said that Herbalife is masking its sales to distributors as hourly consulting fees, as well as charging new recruits an entry fee and allowing distributors to recruit new members. All those activities are illegal in China, Herbalife’s fastest-growing market.
During the telephone presentation, Ackman lawyer David Klafter told the 300 listeners that his “understanding of the facts and law in China is yeah, they are violating both civil and criminal law.”
Jan 23 2015 | 1:00pm ET
In our new section, FINtech Focus, we will profile one of these firms each week. While fintech is a broad category, we will be focusing on firms that specifically cater to the alternative investment industry. Read more…