Herbalife hit with investor lawsuit over 'pyramid' claims

Herbalife Ltd was hit with a shareholder class action lawsuit Monday accusing the multilevel-marketing company of failing to disclose to investors that its operations were based on a pyramid scheme.

The lawsuit, filed in federal district court in Los Angeles, came three days after news emerged that the FBI was investigating the nutrition and weight loss company.

The case appeared to be the first shareholder lawsuit to emerge since hedge fund manager William Ackman in December 2012 unveiled his US$1 billion (S$1.25 billion) short position against Herbalife and said he considered it a pyramid scheme.

Herbalife contends it is a legitamite multilevel marketing company and has sought to counter the claims by Ackman, who runs the US$12 billion hedge fund Pershing Square Capital.

Beyond the FBI, the Federal Trade Commission is also investigating Herbalife. In the wake of the regulatory attention, Herbalife's stock has this year fallen 33.2 per cent. It closed Monday up 4.41 per cent at US$53.75.

The lawsuit on Monday was filed by Abdul Awad, an Herbalife shareholder who claims to have bought the company's stock at inflated prices because of false or misleading statements.

The complaint contends Herbalife misrepresented and failed to disclose that it operated a pyramid scheme in which distributors primarily generated revenue by recruiting other distributors rather than selling products.

The lawsuit also claims Herbalife failed to disclose to investors that it engaged in "deceptive trade practices" to pressure customers to buy more products as distributors.

As part of the proposed class action, Awad is seeking to represent all investors who bought Herbalife securities between May 4, 2010 and April 11, 2014.

Representatives for Herbalife did not immediately respond to requests for comment.