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Herbalife said Wednesday that the Federal Trade Commission had opened an inquiry into its operations, news that briefly sent the nutrition and weight loss company's share price down more than 16 percent.
Billionaire investor William Ackman, who has a $1.16 billion short bet on Herbalife, has for months called on regulators to investigate Herbalife's distribution model, which he calls a "pyramid scheme," where a company makes most of its money by recruiting new distributors rather than selling products to real customers.
Herbalife said it "will cooperate fully with the FTC."
"Herbalife welcomes the inquiry given the tremendous amount of misinformation in the marketplace," the company said in a statement. "We are confident that Herbalife is in compliance with all applicable laws and regulations."
So far, Ackman, who heads Pershing Square Capital Management, has lost money on his short bet as rivals such as businessman Carl Icahn took the other side.
Herbalife's share price fell 16.4 percent on news of the FTC inquiry but later recovered to close at $60.57, down about 7.4 percent on the New York Stock Exchange.
Los Angeles-based Herbalife this week blasted Ackman for carrying out "an unfounded, relentless and fraudulent public attack on Herbalife's business model."
"There has never been merit to his accusations," the company said in a statement March 10.
News of the FTC investigation came one day after a 2-1/2 hour-long conference call on which Ackman accused Herbalife of breaking the law in China.
The FTC has a broad reach to investigate companies that are deceptive. But it does no criminal prosecution and usually is limited to recovering money lost by affected consumers.
The FTC issued a statement acknowledging an investigation into Herbalife but declined to discuss it. Neither Ackman nor a representative of his fund responded to requests for comment.