The Federal Trade Commission initiated a formal inquiry into the business practices of Herbalife. After 22 months of investigation, Herbalife claimed that it is in talks with the government regulators and stated that the outcome of the talks was still uncertain.
According to Reuters, the Federal Trade Commission initiated an investigation to Herbalife after the accusations of the hedge fund manager, William Ackman. The fund manager alleged that it had a fraudulent business model that he even referred to as a pyramid scheme. Ackman's Pershing Square Capital Management also disclosed a $1 billion short bet against Herbalife in 2012.
The weight management company sells weight loss products, including energy shakes and vitamins, has strongly rejected Ackman's allegations. But Herbalife had not yet left a comment about the accusations.
The Thursday's admission was taken by the market with a delighted response in after hours trading. The company's stock even went up to 16%, as mentioned in Fortune.
Moreover, Herbalife noted in its court filing that the FTC investigation could be ending soon because FTC and Herbalife are talking about settlement. "The company is currently in discussions with the FTC regarding a potential resolution of these matters," Herbalife stated via Bloomberg. The filing also revealed that the company cannot estimate the potential loss in relation with the two companies' dispute.
Herbalife exclusively retails its products through a network of independent distributors or members. These members also earn through commissions on sales to other recruited members in the company.
On the other hand, Ackman's fund is roughly going downhill this year. The fund closed in 2015 with a 20.5% loss following a claim of 40% gain in the previous year, which made Ackman recognized as one of the hedge fund industry's biggest stars.
Meanwhile, investors are still optimistic that Herbalife will overcome the dispute without incurring much further damage. Ackman and his Pershing Square capital Management still refused to comment despite the company waging a three-year battle with Ackman and his hedge fund.
