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FTC inquiry into Herbalife prompts big share selloff

The Federal Trade Commission said Wednesday that it had opened an official inquiry into Herbalife, the nutritional supplement company that has been the focus of a 15-month crusade by hedge fund billionaire William A. Ackman.

The commission’s move, after more than a year of lobbying by Ackman, politicians and civil rights groups, could be a boon for Ackman’s $1 billion bet against the company after a series of setbacks, in particular a strong run-up in Herbalife’s share price.

The news of the investigation on Wednesday prompted a sell-off in the stock, which dropped more than 15 percent before recovering somewhat. It closed down 7.4 percent, at $60.57. The success of Ackman’s wager depends on a collapse of Herbalife’s stock price, and he gains ground when other investors sell their shares because they fear the consequences of a regulatory crackdown on the company.

Ackman began his public assault with a presentation in December 2012, contending that Herbalife is a pyramid scheme, which the company has repeatedly denied. He has lobbied members of Congress to press state and federal regulators, specifically the FTC, to investigate Herbalife.

While investigators at the Securities and Exchange Commission moved quickly, opening an inquiry into Herbalife just a month after Ackman’s public presentation, the FTC remained quiet until Wednesday. The commission confirmed the investigation only after Herbalife said it had received a letter from the agency.

The company issued a statement Wednesday after The Financial Times called to ask about the letter. Herbalife said it welcomed the inquiry and would cooperate fully with the investigation. “We are confident that Herbalife is in compliance with all applicable laws and regulations,” it said.

A spokesman for Herbalife declined to disclose the specific nature of the investigation but said the company’s lawyers were notified on Tuesday afternoon that they would be receiving a letter from the FTC on Wednesday.

In a memo sent around to Herbalife employees Wednesday afternoon, the company’s chief executive, Michael O. Johnson, said the inquiry was a “positive development.”

The commission acted after receiving letters from members of Congress urging it to investigate the company, as well as scores of civil rights and Latino advocacy groups, some of which have received financial donations from Ackman’s team.

Ackman declined to comment Wednesday.

Both Ackman and the advocacy groups have called on the FTC to investigate Herbalife for what they say is a pyramid scheme that preys on lower-income Latinos and African Americans.

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