Explaining Southern California's economy

Is the federal government investigating Herbalife?

Herbalife Meeting

SUSAN GOLDMAN

A worker cleans the logo on the Herbalife sign as finishing touches are put on the company's building in Torrance, Calif. A report from the New York Post about an FTC investigation of the company is being questioned.

It initially looked as if the New York Post had broken a story this morning about the Federal Trade Commission (FTC) investigating L.A-headquartered Herbalife for possibly breaking some laws.

The basis of the NYPost story was a Freedom of Information Act (FOIA) request the paper submitted last year, after hedge fund manager Bill Ackman made a massive presentation accusing Herbalife of running a pyramid and announcing a $1 billion-plus bet against the company's stock. 

The NYPost was attempting to determine how many complaints had been submitted to the government involving so-called "multi-level marketing" companies, of which Herbalife is one. Something interesting happened when the request came back:

The FTC redacted some sections, saying it didn’t have to divulge “information obtained by the commission in a law enforcement investigation, whether through compulsory process, or voluntarily ...”

Other complaints contained a note referring to a “pending law enforcement action.” The FTC did not say whether the action was civil or criminal.
After this story hit, Height Securities, a Washington, D.C.-based broker-dealer, circulated a note about its own FOIA request, submitted later than the NYPost's and not involving Herbalife. (Height, founded in 2009, specializes in geneating research about companies with a particular concentration on regulatory issues. It holds no financial stake in Herbalife but has been following the multi-level marketing industry since last year.).
The firm said the same "boilerplate" language about law-enforcement actions was included regarding other multi-level marketing companies that the FTC has received complaints about.
Height's conclusion was that the NYPost story misinterpreted what the FTC is doing with Herbalife.
In an interview, Jarrel Price, an analyst at Height, said the firm is currently taking a "fairly neutral role" in the discussion over Herbalife and the FTC. "We don't have enough data yet," he added.
Height is, however, focused on whether the FTC will investigate Herbalife. "Even if Herbalife were found to be violating pyramid standards, it's open question whether the FTC would act," Price said.
The Los Angeles Times followed the NY Post story with a comment from the FTC [my emphasis is added in bold]:

The FTC said Monday it cited the wrong boilerplate legal language when replying to the New York Post’s FOIA request.

Instead of referring to a “law enforcement investigation” as an exemption used to justify withholding some information, the FTC says it should have cited an exemption involving complaints from a “foreign source,” meaning outside of the United States.

But a Reuters report complicated that assessment when it said the complaint the NYPost saw originated in Iowa.

The last time I checked, Iowa wasn't a "foreign source."

Clearly, nobody - even the FTC! - really has the right facts at this point — although Height is the only one acknowledging that the data is sketchy. The FTC isn't offering any specific comment, and Herblife says it isn't under investigation. It a statement its representatives called the NYPost report "misleading and inaccurate" and demanded a retraction.

Why is this all so important? Because many observers considered Bill Ackman's presentation  a way to brief the FTC on why it should investigate Herbalife. If the FTC is looking into Herbalife's business, his "big short" of the company's stock is back on, after other investors — including Dan Loeb and maybe Carl Icahn — have gone "long" on the stock, betting that Ackman is wrong.

Herbalife's stock took a hit on the news, falling almost 2.5 percent.

Follow Matthew DeBord and the DeBord Report on Twitter. And ask Matt questions at Quora.

blog comments powered by Disqus