Shares of Los Angeles nutritional products company Herbalife Ltd. went on a wild ride Monday, falling 12% on news of a law enforcement investigation, only to close with a gain for the day after a regulatory agency cast doubt on such a probe.
At least one thing is clear about Herbalife: Its investors are extremely jittery.
The New York Post reported Monday that an unidentified law enforcement agency is investigating Herbalife, which has faced intense scrutiny since billionaire hedge fund manager Bill Ackman accused it in December of operating a pyramid scheme and bet $1 billion that its shares would fall.
The Post based its story on a Federal Trade Commission letter in which the agency said it would not release some complaints about Herbalife because of an ongoing law enforcement investigation. Later in the day, the FTC said it had made a mistake and should have cited a foreign government agency, not law enforcement.
Shares of Herbalife surged after the FTC's clarification, adding 47 cents, or 1.3%, to close at $35.54.
"It's being whipped and driven by these exogenous forces," said Timothy Ramey, a D.A. Davidson & Co. analyst. "Unless you have strongly held beliefs about the company, which some people do in both directions, you're going to get influenced by this kind of stuff."
While retracting its statement about a law-enforcement probe, the FTC released more than 100 complaints it has received about Herbalife, many of them from independent distributors who ended up losing money trying to sell its products. The FTC would not say whether it was investigating.
Herbalife said in a statement that it was unaware of a criminal investigation and considered the FTC complaints insignificant.
"For a direct selling company of our size, we have had a relatively low number of complaints to the FTC," Herbalife said. "However, we take every one of them seriously and stand by our record of doing right by our distributors and all consumers of our products."
Herbalife — which sells diet, nutrition and beauty products in more than 80 countries — reported earnings of $413 million on $3.5 billion in sales in 2011. It is scheduled to release last year's results this month.
Founded in 1980, Herbalife is a so-called multi-level marketer, paying distributors commissions for their own sales as well as for those made by distributors they recruit. The only way for consumers to buy Herbalife is through independent distributors; its products are not sold in stores.
The company employs more than 1,000 people in Southern California. Its headquarters are at L.A. Live, the entertainment and business complex near Staples Center in downtown Los Angeles.
In December, Ackman made a flashy, multimedia presentation to outline his case that Herbalife is an illegal pyramid scheme. He said the company's independent distributors are paid more money for recruiting new salespeople than for selling its products.
Ackman said that 90% of Herbalife distributors make little or no money, while a select few — those at the top of the pyramid — make huge profits. The company's chief executive, Michael O. Johnson, was the highest-paid executive in the United States in 2011, raking in more than $89 million in salary, exercised stock options and other compensation, according to GMI Ratings, a corporate governance firm.
In complaints to the FTC, some distributors said they ended up losing money trying to sell Herbalife products.
"I have been suckered into a pyramid," one Herbalife distributor wrote. "I was basically going to go bankrupt if I continue."
Countering Ackman's huge short position, which pays off if the stock price falls, another billionaire investor, Carl Icahn, took an undisclosed stake in Herbalife, betting essentially that the stock would rise.
The two squared off in a profanity-filled debate broadcast live by CNBC on Jan. 25 with Icahn calling Ackman a "liar," and Icahn countering that Icahn was "not used to someone standing up to him, particularly a little guy like me."
Ramey, the analyst, said he is recommending that investors buy Herbalife shares.
"It's not a pyramid scheme. It doesn't look at all like pyramid schemes look," Ramey said. "Companies that have been judged to be pyramid schemes don't look like real companies and they don't sell real products."
That said, Ramey expects a rough road for Herbalife shares.
"It's easy for me to sleep comfortably at night," he said, "but that doesn't mean it's not going to be volatile on a day-to-day basis."
stuart.pfeifer@latimes.com
Times staff writer Andrew Tangel contributed to this report.
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