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Herbalife Tumbles as FTC Opens Investigation

Updated from 2:23 p.m. ET to include Kerrisdale Capital comment

NEW YORK (TheStreet) - The Federal Trade Commission has opened an investigation of multi-level supplements seller Herbalife (HLF - Get Report). The move comes over a year after hedge funder Bill Ackman of Pershing Square Capital Management took a $1 billion short position in Herbalife's shares and accused the company of being a pyramid scheme.

Herbalife disclosed the probe on Wednesday afternoon and said it "welcomes the inquiry" and will cooperate fully with the FTC. Dan McCrum of the Financial Times Alphaville blog first reported of the inquiry.

"Herbalife welcomes the inquiry given the tremendous amount of misinformation in the marketplace, and will cooperate fully with the FTC. We are confident that Herbalife is in compliance with all applicable laws and regulations," the company said.

"Herbalife is a financially strong and successful company, having created meaningful value for shareholders, significant opportunities for distributors and positively impacted the lives and health of its consumers for over 34 years," the Los Angeles-based company added.

A Pershing Square spokesperson declined to comment.

Shares of Herbalife, which were halted earlier today, were down 8.2% at $60.03 in mid-afternoon trading.

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"It's interesting the stock is down only 8% on the news of the civil subpoena from FTC. I think the idea is that we'll finally put the regulatory issues to rest after the FTC investigation, although it may take a long time for the FTC to conduct its investigation," Sahm Adrangi, founder and CIO of hedge fund Kerrisdale Capital, a Herbalife investor, said.

"Given that it's practically impossible for the FTC to shut down the company's non-US operations, this development will accelerate the time when the long-term fundamentals of the story will ultimately overshadow the headline risk concerns."

Kerrisdale Capital believes Herbalife shares are worth over $100 a share under all regulatory scenarios and the firm won't be selling shares at current levels Adrangi said.

The FTC's inquiry is one of the most dramatic twists to Ackman's trade since he disclosed his short bet in December 2012. Since then, hedge funders such as Dan Loeb of Third Point Management and Carl Icahn have taken opposing bets to Ackman's short trade.

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