[ by Melanie Gretchen ]

The SEC is biting into Herbalife by opening an investigation into the nutritional supplements company.  Under scrutiny are the company's sales practices, including a network of independent resellers who are incentivized to recruit others.

The Investigation. At stake is the company's sales structure, a question first opened up by William Ackman, a company critic and the head Pershing Square Capital Management.  Late last year, he bet hundreds of millions of dollars against Herbalife, calling it "the best-managed pyramid scheme in the history of the world."  His claim: that the product's suggested retail price was "an artificial, inflated number," and that recruitment was a crucial money maker for salespeople, i.e. Herbalife shares are worth nothing. 

In Herbalife's defense, Daniel Loeb called Mr. Ackman thesis "preposterous."  He has good reason to think so: his firm, Third Point Management, bought more than 8% of Herbalife.  He believes that shares in Herbalife would rise based on its revenue, profit, earnings per share and free cash flow.

"While the short seller's presentation was lengthy.  it presented no evidence to show that Herbalife has crossed a line that would compel regulators to shut it down." -- Mr. Loeb, in a letter on Wednesday, referring to Mr. Ackman.

Someone may be very disappointed.  As far as the SEC is concerned, Herbalife hasn't been accused of any wrongdoing.

For further details, go to [Dealbook, 1/9/13].