Herbalife shares took a dive late Friday afternoon after a news report linked the diet supplements company to a criminal investigation.
The Financial Times reported that federal prosecutors and the F.B.I. were scrutinizing Herbalife for signs of a fraud, news that seems to have ignited a sell-off in Herbalife shares. The stock finished the day down nearly 14 percent at $51.48.
The hedge fund manager William A. Ackman has staked a billion-dollar bet that the company is a pyramid scheme.
It is unclear whether the F.B.I. investigation has gained much momentum. An official briefed on the matter told The New York Times that the inquiry has continued for several months without Herbalife receiving a subpoena. It is possible, the official said, that the authorities will close the case without taking action against Herbalife.
For its part, Herbalife cast some additional doubt, saying that it was unaware of any criminal inquiry. It would be unusual, but hardly unheard of, for authorities to not contact a company if a monthslong criminal investigation had yielded any major breakthroughs.
“We have no knowledge of any ongoing investigation by the D.O.J. or the F.B.I., and we have not received any formal nor informal request for information from either agency,†Herbalife said in a statement. “We take our public disclosure obligations very seriously. Herbalife does not intend to make any additional comments regarding this matter unless and until there are material developments.â€
The criminal inquiry coincides with civil investigations by the Securities and Exchange Commission and the Federal Trade Commission. Both regulatory agencies, which face a lower burden of proof than criminal authorities, could fine Herbalife if they conclude its marketing practices amount to a pyramid scheme.
The investigations are focused on Herbalife’s direct-selling business model: The company distributes its diet shakes, supplements and other products through a network of salespeople.
To show that it is operating within the law, Herbalife might have to demonstrate that it sells the majority of its products outside the sales network to consumers. If authorities conclude that the bulk of Herbalife’s revenues are derived from recruiting rather than sales, then the company could face a regulatory action.
Investing in, and betting against, Herbalife has become something of a blood sport for hedge fund managers and billionaire investors, particularly Mr. Ackman and Carl Icahn. For nearly 18 months, the two wealthy investors have squared off over the company, with Mr. Ackman and his firm, Pershing Square Capital Management, wagering the company is an illegitimate pyramid scheme, and Mr. Icahn betting the company will survive all legal scrutiny.
Mr. Ackman has been heavily lobbying the S.E.C. and F.T.C. to open an investigation into Herbalife marketing practices. He has vowed to pledged to take to the fight to the “end of the earth.â€
Other hedge fund managers, meanwhile, have been in and out Herbalife shares, even as Mr. Ackman and Mr. Icahn have stood their grounds. The billionaire investor George Soros and Daniel Loeb, chief of the hedge fund Third Point, have money on Herbalife last year by betting that the stock price would rise.
Before Mr. Ackman disclosed in December 2012 that his hedge fund had taken a $1 billion short position against Herbalife, James Chanos, one of Wall Street’s best-known short-sellers had briefly bet on the stock’s decline.
Short sellers make money by borrowing shares and betting a stock will fall in price in hopes of purchasing those shares at that lower price and pocketing the difference after they close out their position. The risk for short sellers is that if a stock continues to rise, their potential losses can become so great they have no choice but to exit the stock.
Shares of Herbalife are about $11 above the price the stock was trading when Mr. Ackman disclosed that he was betting against the company’s fortunes.
