Shares of Herbalife dropped more than 8% Wednesday after the nutritional products distributor revealed that was being investigated by the Federal Trade Commission. Trading of the stock was briefly halted prior to the announcement.
"Herbalife welcomes the inquiry given the tremendous amount of misinformation in the marketplace," the company said in a statement. "Herbalife is a financially strong and successful company, having created meaningful value for shareholders, significant opportunities for distributors and positively impacted the lives and health of its consumers for over 34 years. "
The company has been heavily scrutinized ever since hedge fund manager Bill Ackman first called Herbalife (HLF) a pyramid scheme more than a year ago. Ackman's Pershing Square Capital Management hedge fund has a $1 billion bet the company's stock price will fall.
So far, the trade has not worked out. Even with the big drop on Wednesday, Herbalife shares have soared 50% over the past 12 months, leading to significant paper losses for the fund. Ackman and Pershing Square declined to comment about the FTC probe.
Just Tuesday, Ackman unveiled new evidence Tuesday that he said shows Herbalife, which sells nutritional supplements through a network of independent distributors, is operating in violation of Chinese law.
Ackman argues that Herbalife makes its money by selling products to distributors, who in turn sell to other local sales people, rather than actual end users. He has accused Herbalife of targeting Latinos in the U.S. as an attempt to exploit immigrant communities.
According to a report Monday in the New York Times, Ackman has actively lobbied members of Congress to support his cause. He's also funded letter-writing campaigns and grass-roots groups against Herbalife, the paper said.
Previously, the FTC has said that multi-level companies would be deemed an illegal pyramid scheme if salespeople sell more products to other distributors rather than to the public or if they make more money from recruiting than they do from selling products. The concern is that lower-level distributors may be stuck with unsold products.
Herbalife rival USNA Health Sciences (USNA) fell over 6% on the Herbalife probe news. Like Herbalife, the stock has enjoyed a big run, surging 45% in the last year.
Beauty products marketer Nu Skin Enterprises (NUS), which has been accused of making bogus advertising claims by the U.S. Federal Trade Commission, bucked the trend. Its shares were up 4% in late trading Wednesday after falling initially on the Herbalife news.
CNNMoney's Ben Rooney contributed to this report
By Lee Munson
Carl Icahn is trying to portray himself as a shareholder activist. His Twitter profile page makes him look like a cross between a wise, old grandpa ready to help Main Street investors and "The Most Interesting Man in the World" from those Dos Equis ads.
But he's still a pirate and corporate raider. Just look at his recent attacks on eBay (EBAY).
Icahn wants the online auction company to spin MOREMar 11, 2014 7:30 AM ET
Bill Ackman has said he will go "to the end of the earth" to bring down Herbalife. Tomorrow, he will take the fight to China.
The hedge fund billionaire plans to unveil new evidence Tuesday that he says shows Herbalife (HLF), which sells nutritional supplements through a network of independent distributors, is operating in violation of Chinese law.
Pershing Square Capital Management, Ackman's $11 billion hedge fund, will release a report showing MOREBen Rooney - Mar 10, 2014 11:53 AM ET
The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.
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For most of 2013, the animals of the more ursine variety were trouncing their taurine rivals. But MOREPaul R. La Monica - Dec 4, 2013 12:41 PM ET
Cue the Apple "iCahn" jokes. Apple's stock topped the $500 mark Wednesday for the first time since January. Shares moved higher for a second day on the news that activist investor Carl Icahn has taken a "large" position in the company.
Shares crossed the psychologically important level and climbed as high as $504.25 in afternoon trading, before settling just below the mark at $498.50.
Still, the recent gains have boosted Apple's value by MOREHibah Yousuf - Aug 14, 2013 4:10 PM ET
Carl Icahn has yet to sell even just one share of his stake in Netflix, and for good reason: the stock is currently trading at a three-year high and may soon be on its way to an all time-high.
While shares of the usual high-flier bounced around the breakeven line Thursday, they've been having quite the run.
Shares of Netflix (NFLX) have rallied 10% over the past five days, and have nearly MOREHibah Yousuf - Jul 18, 2013 2:41 PM ET
You're doing better Sony (SNE), but not good enough... yet.
That's the latest message from Dan Loeb, the firebrand hedge fund manager known for vociferously agitating for changes at some of the world's largest tech firms.
In a sign of "increased confidence," Loeb's Third Point hedge fund increased its stake in Sony to 70 million shares, or roughly 7%, from 6% in May.
Related: Hedge fund targets Sony for spin-off
At least part of MOREMaureen Farrell - Jun 18, 2013 2:36 PM ET
Paul R. La Monica - May 1, 2013 1:04 PM ET
Seven years ago, activist investor Carl Icahn spelled out a blueprint for breaking up media conglomerate Time Warner (TWX) into four separate entities.
With this week's decision by CNNMoney's parent company to spin off Time Inc., Icahn's prediction is finally coming true. But he won't be able capitalize on it. By late 2008, Icahn had completely sold his stake.
In 2006, Icahn pushed for Time Warner to essentially split itself into MOREMaureen Farrell - Mar 8, 2013 2:09 PM ET
Chesapeake Energy (CHK) announced a deal Monday to sell half of its oil and gas assets in northern Oklahoma to Sinopec, one of China's largest oil producers, for $1 billion.
Chesapeake's shares dropped nearly 5% as investors worried that the embattled Oklahoma City gas company sold the assets at a discount.
"There's been a concern that Chesapeake's weakened financial position would make them do deals at low prices," said Phil Weiss, an analyst MOREMaureen Farrell - Feb 25, 2013 11:39 AM ET
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