On Wednesday, the Federal Trade Commission launched a formal investigation to look into Herbalife Ltd's operations regarding allegations that it is operating a pyramid scheme, CNBC said in its report. According to an unnamed source who is familiar with the probe, Herbalife was said to have been surprised with the commission's decision to investigate the company but decided that the outcome of the probe could silence critics about the company's business model. CNBC said that the commission probe is expected to last a minimum of a year.
Following FTC's opening of the probe, Herbalife released a statement, which read, "Herbalife welcomes the inquiry given the tremendous amount of misinformation in the marketplace."
On the same day, hedge fund manager Bill Ackman claimed that the nutrition company had broken direct-selling laws in China. Herbalife is said to be doing well in the mainland, which is its fastest-growing market.
When asked by CNBC about their comments about the FTC probe, Ackman and his firm Pershing Square refused to provide any. FTC on the other hand, acknowledged that it did launched a probe on Herbalife, but refused to provide additional details to the news outlet.
The news about the probe had an effect on investors, and Herbalife saw its shares diving to as much as 15% after halting temporarily. The company ended the day with a 7.3% decrease in share price. Its rival Nu Skin, on the other hand, saw the trading of its shares halted temporarily by a circuit breaker due to volatility, CNBC said.
Chief market analyst Andrew Wilkinson at Interactive Brokers wrote which could have been the genera reaction of investors in the options market, "The level of implied volatility surged from 50 percent to 99 percent with the downside range expanding from $50 by next week's expiration down to $30. Ahead of the halt only 25,000 contracts had traded on Herbalife and within 15-minutes the tally had risen to 57,000."
