Investigation shakes up Herbalife battle

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The Daniel Loeb vs. William Ackman battle over Herbalife was fascinating enough, even before the SEC launched an investigation into the company.

The focus of the probe is unclear, but most people will assume that sales practices will be at least an issue. The bullish case that Daniel Loeb has articulated is predicated on the idea that government investigators are not likely to find that Herbalife is a big fraud and shut it down. He finds the suggestion so preposterous that he was willing to take an 8 percent stake in the company. 

Most people have assumed that the FTC would be the regulatory entity most likely to take such action. But what about the SEC? The investigation comes as a surprise, one that might be favorable to Ackman, who is betting against the company. But longer term, the issues are basically the same.

For the shorts to win big, Herbalife at some point will have to be seen widely as a fraud, and it would really help if prosecutors were to allege as much formally. It could be the SEC, or it could be the FTC. They might attempt a joint investigation. At this point, it doesn't appear as though the impasse will be resolved anytime soon. These investigations take time.  

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