Published On: Sun, Apr 13th, 2014

FBI maybe investigating Herbalife for unethical marketing practices. Bill Ackman pleased

Ackman’s shares in Herbalife plummeted by 14% in just two hours as the market closed for the weekend.

BILL ACKMAN screen shot

William ‘Bill‘ Ackman, billionaire owner of Pershing Square Capital Management will have taken scant pleasure over the weekend with the news that Herbalife, the nutrition and weight loss company in  which he holds a major investment maybe now under investigation by the FBI and US Department of Justice attorneys.

Ackman himself has not been slow in accusing Herbalife of operating of the business as a form of pyramid scheme, although he stands to lose a considerable amount of money if it is proven that the company had been using unethical selling activities, receiving an initial breaking news on Friday, sparking off a sharp share sell off on Wall Street, knocking around 15% of Herbalife stock value, which eventually closed at $51.48 for the weekend, meaning that the company has lost in excess of $847 million in market value since the  news broke  of the FBI investigation.

While the FBI and other federal authorities believed to be involved in the investigation are keeping tight lipped about it,  Herbalife almost immediately issued a statement denying any knowledge whatsoever of the existence of an ongoing investigation, going on to add that the company does not intend to make any additional comments regarding this matter unless and until there are material developments.

Rumors began to build regarding the possibility that Cayman Islands-based Herbalife while operating an illegal pyramid scheme in late 2012, and since then have experienced some major ups and downs in defending their reputation as well as their share value ever since. At one time shares in  Herbalife dropped as low as as $27, have been recovering well in 2014, rising to well over $80 after the company was handed a clean slate by audit firm Pricewaterhouse Coopers in December 2013.

Herbalife’s stock price took another blow to its health when the Federal Trade Commission opened an inquiry regarding Herbalife’s trading practices, with investigation apparently instigated by Ackman himself. At that time Herbalife announced that they welcomed the investigation, with them quoted as saying that they saw it as  an opportunity to clear its tarnished reputation due to the market’s uneasy affinity to the company’s business model.

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Pershing Square Capital Management invested $1 billion in Herbalife in 2012 and shortly after Ackman came out in public in protest over the company’s marketing practices, claiming that they were marketing their products through a pyramid scheme, which  is considered illegal as any company operating such a business model ostensibly makes more profit through selling the products to their independent sales force rather than directly to the public.

Whilst Bill William Ackman has been highly critical of Herbalife and their activities, the company has a more than able ally in another giant of the investment world,  Carl Icahn, who purchased a considerable holding in the company last year.

With Ackman estimated to be in a position to break even on his billion-dollar investment if he sells his parcel of shares, even at their before the weekend closing diminished value, the chances are that the midnight oil will be burning at Pershing Square over the weekend as a final decision may  well be made regarding the troubled relationship with Herbalife.

 

William Ackman graduated with a Bachelor of Arts degree magna cum laude from Harvard College in 1988, later going on to his Masters degree from Harvard Business School in 1992.

That same year, Ackman co-founded Gotham Partners, which made minority in some of the United States’larger public companies.  In 1995, Ackman’s increases company’s activities considerably through forming a partnership with Leucadia National,  the insurance and real estate giant,  growing Gotham Partners to a company with assets running into the hundreds of millions before winding the company down  in 2002.

In 2004, Ackman was back in business, establishing Pershing Square Capital Management, with some of the capital backing coming from Leucadia National, and he began to gradually acquire interests in companies throughout North America,  eventually growing to become one of the  most dynamic investment companies with assets to be in excess of $8 billion.

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