April 17, 2014
CHICAGO—Illinois Attorney General Lisa Madigan is investigating Herbalife Ltd., the marketer of nutritional and weight loss products whose business practices are being scrutinized by state and federal authorities.
"We are confident in the integrity of our long-standing business and the Company's compliance with applicable laws and regulations," Herbalife said today in a statement. "We look forward to working with the Illinois Attorney General's office to resolve the consumer complaints it has received."
A spokesperson for Madigan's office confirmed the investigation just three days after the New York Post, citing anonymous sources, reported that New York Attorney General Eric Schneiderman is investigating claims that Herbalife is a pyramid scheme. Matt Mittenthal, press secretary for the New York State Attorney General, said he couldn't confirm or comment on the Post's report.
Maura Possley, press secretary for the Illinois Attorney General in Chicago, who confirmed Herbalife is under investigation, did not provide further information. Reuters first reported on the probe earlier today.
It has been a rough few weeks for Herbalife, whose multi-level marketing (MLM) business model is being investigated by an increasing number of state and federal government authorities.
On Monday, an Herbalife shareholder sued the company in California federal court in an effort to represent a class of investors. Abdul Awad, the plaintiff, claimed Herbalife made false and misleading statements and/or failed to disclose the company is a pyramid scheme and inappropriately pressured its members to buy more products to resell as a distributor, according to court documents filed in the U.S. District Court for the Central District of California.
Julian Cacchioli, a spokesman for Herbalife, said the lawsuit lacks merit and the company planned to mount a vigorous defense. Herbalife also is defending a lawsuit that was filed last year by a former distributor.
"These unfounded claims, styled as a securities suit, are no more than a recitation of ill-informed allegations about the company's business model previously made by a hedge fund manager orchestrating a campaign against our company in support of his $1-billion reckless bet," Cacchioli said. "As we have stated repeatedly, we are confident in our products and in our compliance with all applicable laws."
Last week, the Financial Times, citing "people familiar with the matter," broke the news that Herbalife was being invested by the Federal Bureau of Investigation and U.S. Department of Justice. Other media outlets also confirmed the investigation. Herbalife said it was unaware of the investigation and neither the FBI nor the Justice Department had requested information from the company.
The recent developments come on the heels of last month's revelation that FTC is investigating Herbalife, which has acknowledged receiving a civil investigation demand from the agency.
The government probes are a boon for hedge fund manager Bill Ackman, who bet $1 billion that Herbalife would collapse. Ackman's Pershing Square Capital Management took a short position on Herbalife's stock, which allows its investors to profit if the stock price falls. According to an article in Bloomberg last month, Ackman said Pershing's investors would make about $2 billion if Herbalife disappeared.
Since at least December 2012, Acman has accused Herbalife of operating a pyramid scheme that achieves few legitimate sales and exploits low-income distributors. As detailed in the shareholder lawsuit, Ackman contended 1.9 million distributors have failed to make money from Herbalife, incurring cumulative losses of USD $3.8 billion.
Herbalife has repeatedly denied the pyramid scheme allegations and said most of its distributors, or members, purchase its products for their own consumption rather than as a business opportunity.
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