The FBI has opened an investigation into Herbalife Ltd, the company that hedge fund manager William Ackman has called a pyramid scheme. The FBI investigation has been going on for some time, according to sources.
The news sparked a sharp sell-off that sent the stock price down nearly 14 percent.
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 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 said.
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.
Herbalife Denies Scheme
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.