Herbalife Ltd., the nutrition company that hedge fund manager Bill Ackman has accused of being a pyramid scheme, fell the most in a year after a U.S. senator called for a probe into the company’s operations.
The shares slid 10 percent to $65.92 at the close in New York. Cayman Islands-based Herbalife more than doubled last year.
U.S. Senator Edward Markey, a Massachusetts Democrat, sent letters today to the U.S. Securities and Exchange Commission and the Federal Trade Commission urging the agencies to look into Herbalife’s business practices. Markey also wrote to the company and is seeking a response to his questions by Feb. 28.
“There is nothing nutritional about possible pyramid schemes that promise financial benefit but result in economic ruin for vulnerable families,” Markey said in a statement today. “Herbalife may be a purveyor of health and wellness products, but some of its distributors are suffering serious economic ill-health as a result of their involvement in the company. I have serious questions about the business practices of Herbalife and their impact on my constituents.”
Herbalife has Markey’s letter and will “address his concerns at his earliest convenience,” Barb Henderson, a company spokeswoman, said in an e-mailed statement today. John Nestor, an SEC spokesman, declined to comment before the agency responds to Markey’s letter. Peter Kaplan, a spokesman for the FTC, said the commission has received the letter and declined to comment further.
In 2012, the SEC asked why the company viewed disclosures related to its distributors as immaterial to investors. The query followed similar questions from hedge-fund manager David Einhorn, who asked on a conference call why Herbalife stopped disclosing a breakdown of three groups of distributors. The SEC subsequently said it had completed its review following an explanation from Herbalife, according to correspondence between the agency and the company.
Markey’s announcement is a boon for Ackman, who since December 2012 has been urging regulators, elected officials and community activists to investigate the company, saying it misrepresents sales figures, misleads distributors about potential earnings and sells a commodity product at inflated prices.
Ackman’s New York-based Pershing Square Capital Management LP initially sold short at least 20 million Herbalife shares and had lost money on the bet as the stock more than doubled in 2013 and investors, including billionaire Carl Icahn, backed Herbalife. Ackman said in a letter in October that he’d replaced some of his equity short stake in the company with long-term put options. In November, he said he would take his bet against Herbalife “to the end of the earth.”
Ackman said in an e-mail he hasn’t given money to Markey.
Hedge-fund manager Icahn, who bought Herbalife shares after Ackman made his accusations and sold the stock short, is the company’s largest individual investor, with a 17 percent stake, according to data compiled by Bloomberg.
Herbalife, which sells nutritional and weight-loss products through individual sellers, has repeatedly denied Ackman’s allegations. In December, the company said PricewaterhouseCoopers LP found no material changes in a re-audit of the company’s financial reports dating back to 2010.
Hedge fund manager Robert Chapman, who has criticized Ackman’s Herbalife allegations and previously bought and sold a stake in the company, said he purchased some shares today at about $64.
“This could be viewed as bullish from the standpoint that if the FTC or SEC was far along in making any substantial move against Herbalife before these Markey letters, Markey wouldn’t have been compelled to send them,” Chapman, founder of hedge fund Chapman Capital LLC in Manhattan Beach, California, said in an e-mail.
Herbalife sells its vitamins, skin gels and shake mixes through a marketing network of independent distributors in more than 90 countries. Those independent contractors earn revenue by selling products directly to customers and recruiting new distributors, for which they earn a share of those sales and incentives from the company.
Markey, 67, was elected to the Senate last year after more than 36 years in the House of Representatives. He filled the seat vacated when John Kerry became secretary of state. He is a junior member of the Senate Commerce Committee without the ability to call a hearing or begin an investigation.
Ackman has donated to candidates from both parties. According to federal campaign finance records, he gave the Senate Democrats’ main campaign committee a $32,400 contribution on April 30, 2013, the same day Markey won a primary election in Massachusetts. Ackman had made similar donations to Senate Democrats in several prior years.
Herbalife’s political action committee contributed $5,000 to Senate Democrats on Aug. 15, 2013.