Could Herbalife management end up in jail? Although we won’t speculate on the likelihood of this happening, it’s possible because the Department of Justice appears to be involved. John Gavin at Probes Reporter updated his investigation into Herbalife with an updated letter he received from the Securities and Exchange Commission and some thoughts on what might be happening with the three investigations into the multi-level marketing company that appear to be ongoing.

 

Herbalife Ltd. HLF
SEC enforcement probe ongoing at Herbalife

A short time ago, Herbalife bull Tim Ramey of Pivotal Research suggested that the investigation Gavin has been reporting on for some time ended a couple of years ago. When Ramey’s report came out, we said it seemed impossible that he could possibly be right about that, and now we have confirmation.

Gavin is known for his expertise in the area of Freedom of Information Act (FOIA) requests. He requests information on various public companies to see if regulators have taken an interest in them, and Herbalife has been on his radar for some time. Specifically, he requests information pertaining to enforcement investigations by the SEC, and the latest response he received from the agency is dated Aug. 12. It states that there appears to be an investigation still ongoing.

Ramey based his conclusion on a response he received from the SEC regarding an investigation into the company, but Gavin found that response suspect, particularly because he himself had received false negatives on Herbalife from the SEC in the past and then later received confirmation of a probe after appealing that response to his first letter.

Gavin appeals Herbalife letter

Interestingly, Gavin received a letter dated July 27 which stated that no information about an investigation of Herbalife was found, which was the same response Ramey received to his letters. He filed an appeal and received confirmation that there actually was an investigation by the SEC’s enforcement division. The letter also states that the record search conducted for the July 27 letter was actually not thorough enough, which was why the July letter indicated that there was no investigation.

Here are some key excerpts from that Aug. 12 letter Gavin received:

Herbalife

Herbalife 2

DoJ investigating Herbalife

Herbalife management has time and time again tried to reassure investors that all is well and there’s nothing to fear, but then a new bit of news calls their reassurances into question. In all of the company’s filings, management treads very carefully, and understandably so. It’s their duty to shareholders to protect it.

Gavin notes that in November 2014, Herbalife denied knowledge of any criminal investigations in its filings, but that language was dropped in February and hasn’t returned. Then in May, it was revealed that the DoJ had gotten involved in the Herbalife story. Whenever there is a criminal investigation, it’s possible (but by no means guaranteed) that someone could go to jail.

Herbalife management’s “stealth disclosure”

Herbalife management made what Gavin calls a “stealth disclosure” of an SEC enforcement investigation in February 2013, basically making just a tiny reference to a meeting Herbalife requested after the initial allegations were raised by short-seller Bill Ackman in December 2012.

In that meeting, the SEC apparently asked for “information regarding the Company’s business and financial operations.” Gavin believes Herbalife requested the meeting because the SEC notified management that the company was under investigation—a conclusion that makes perfect sense. Why call attention to yourself if regulators haven’t taken an interest on their own?

Disclosure games?

Interestingly, Gavin says that by now, “Herbalife management is so good at misleading and/ or keeping things from investors, they could teach a class on it. He also reports that although the company’s filings claim repeatedly to have disclosed an investigation by the SEC, the only thing “resembling disclosure” of an SEC investigation was that February 2013 filing.

He also points out that Herbalife’s filings basically repeat the same language regarding investigations by the SEC, FTC and DoJ.

Reading between the lines of Herbalife’s filings

Reading further between the lines in Herbalife’s November 2014 filing reveals that the company only said that there were no criminal investigations of its company or business model at that time. This left a hole in that individuals connected to the company could have been the focus of a criminal investigation. And the disclosure in May 2015 then goes on to report that the DoJ was investigating “the Company, certain of its Members and others.” In other words, it looks like the agency might have widened its probe pertaining to Herbalife. But again, company management has been very careful about all of this, so we have no clarity on what’s going on.

For Gavin’s full report, you can register at Probes Reporter. He estimates how much Herbalife is spending on people to protect itself from the legal and regulatory risks, and the amount is quite staggering. In fact, he states: “You’d need a small building to house all the outside people working on Herbalife’s combined probes.”

We have reached out to Herbalife for a comment on this story and will update it if one is received.

Also check out the video he posted on YouTube below.