Bill Ackman can take a breather now. After two years of accusing Herbalife as an illegal pyramid scheme, he had started to run out of time for his $1.2 billion short play to develop. Today, Herbalife announced that it received a "civil investigative demand" from the Federal Trade Commission (FTC), due to possible "unfair or deceptive acts of practices". Can you imagine the office party that Ackman must have thrown when he heard this news?
Herbalife is in the business of distributing nutritional shakes and supplements to distributors in more than 80 countries. Ackman's accusation of it being a pyramid scheme basically means that Herbalife is a business where a substantial amount of profits are generated through recruitment, rather than sales of actual products to actual customers. Therefore, the more recruits Herbalife brings on, the more revenue it will get. The FTC has a dynamic hand in the review process and will certainly uncover information any deceptive information about Herbalife if it does have any.
However, it's important to note that the FTC might not uncover anything and Ackman's bet may still tank. Consumer groups and other organizations have been pushing the FTC to investigate Herbalife for the past year now. Yet, despite the seemingly negative energy, Herbalife shares have rose constantly within the past year. To make matters worse for Ackman, his fellow tier-one investor rivals Carl Icahn, William Stiritz, and George Soros all took stakes in Herbalife. But the fight isn't over and through the long press conferences, superfluous powerpoints, and lobbying in Washington, Ackman finally has some merit to his claims with this FTC investigation. It's a showdown on Wall Street, and Ackman has more than just his billion dollars on the line; with his recent loss on his bullish bet on J.C. Penney, Ackman can't afford another mishap or his reputation, and possibly all of Pershing Square, will implode.