Shares of Herbalife Ltd. HLF jumped approximately 9% on news that Federal prosecutors and the Federal Bureau of Investigation (FBI) are questioning affiliates of activist investor Bill Ackman, hedge fund manager of Pershing Square Capital Management.
Per The Wall Street Journal, the FBI and prosecutors have requested documents from people who were reportedly hired by Ackman in his campaign against HerbalLife. It is also being probed whether false statements were made about Herbalife’s business model to spur investigation into the company and lower its stock price.
In response, Herbalife stated that it is confident about its strong fundamentals and remains committed to help people live a healthy life. It accused Ackman of making false accusations to enrich himself.
Over the past 14 months, Ackman has been accusing Herbalife of running a pyramid scheme business model. That is, it boosts business through deceptive marketing practices. The company was accused of making money by recruiting new sales personnel and not from sales.
In Dec 2012, Ackman revealed a $1 billion short position in Herbalife’s shares and accused it of employing such means to further its business. He even sent a letter to Herbalife on Dec 24, 2013 about the improper recruiting methods.
Reportedly, Ackman tried to lobby Congress members to push for an investigation against Herbalife by state and federal regulators, especially the Federal Trade Commission. Such an attempt shows his determination to prove the charges. Herbalife has denied the charges all along.
Again, in Jan 2015, the billionaire investor accused Herbalife of operating illegally in China and warned investors about probable violation of multi-level market restrictions in the country. Ackman also backed his allegations with a bet of $1 billion that the stock will fall to zero within a year. (Read: Herbalife Faces Another Ackman Attack)
Back-to-back allegations against the Zacks Rank #4 (Sell) company has made it difficult to recruit sales professionals to distribute its products. Herbalife is not the only company, which employs sales representatives to sell its products. Other multi-level marketing companies like Nu Skin Enterprises Inc. NUS, USANA Health Sciences Inc. and Avon Products Inc. AVP also follow the same model.
A better-ranked stock in the retail drug store category is Diplomat Pharmacy Inc. DPLO carrying Zacks Rank #2 (Buy).
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