Bill Ackman, the hedge fund manager, has accused Herbalife Ltd of being nothing more than a pyramid scheme. The company is now being probed by the FBI says a source familiar with the investigation.
The source said federal authorities have started to investigate the marketing practices of the company. The source requested anonymity since the investigate remains private.
A leading business journal reported that the Manhattan U.S. Attorney’s office and the FBI were behind the investigation.
Herbalife, which reported it did not know of any FBI or Department of Justice probe, has spent over a year denying the accusations made by Ackman that it is misleading to its distributors, its commodity products have inflated prices and it misrepresents sales.
Over that period of time, the company has gained allies like Carl Icahn the billionaire investor, who is now the company’s largest individual shareholder.
One analyst on Wall Street was quick to point out that not every probe produces an indictment. The analyst has a recommend label on buying the shares. She said she would wait until there were more developments and details prior to forming an opinion.
Herbalife, based in the Cayman Islands, dropped by 14% on Thursday on Wall Street to end the day at $51.45. The dropped was the largest in one day since December 21, 2012, which is the day after Ackman released his arguments against Herbalife in a three-hour plus presentation.
Representatives for Icahn did not respond immediately for a comment. A spokesperson for the U.S. Attorney in Manhattan would not comment either.
Herbalife, which sells shakes that replace meals and vitamins through a huge network of distributors that are independent, has said that it has not received any information from the Justice Department of the FBI.
The company spokesperson also said that Herbalife would not make any further comments regarding the matter unless there were any material developments.
The company disclosed in March that a civil probe had been started by the Federal Trade Commission into the company practices, which is something Ackman sought since his company Pershing Square Capital Management bet $1 billion against shares of Herbalife.
A Massachusetts Senator has asked the FTC to look into the business practices in Herbalife. An advocacy group named the League of United Latina American Citizens has also met with Edith Ramirez the agency head to describe the alleged abuses carried out by the company.
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