Pyramid Schemes

Hawaii state prosecutors said Wednesday they are investigating an Orange County company to determine if its sales of how-to kits to would-be travel agents constitute an illegal pyramid scheme. In addition, World Class Network in Irvine faces a securities probe by another Hawaii agency to determine if it is selling unregistered securities in the form of distributorships.

The Justice Department and FBI have opened an investigation of Los Angeles nutritional products company Herbalife Ltd., which has been fighting critics who say it's operating an illegal pyramid scheme. Law enforcement sources confirmed the investigation. The FBI started looking into the company "more than several months ago," said a person who has been briefed on the investigation. "We are doing our job of getting to the bottom of this issue," said the official, who asked not to be identified because the investigation is ongoing.

Four Kentucky residents have been sentenced to prison and ordered to reimburse a church they bilked out of nearly $200,000 in what prosecutors described as a classic pyramid scheme. U.S. District Judge Joseph R. Goodwin acknowledged that most of the four defendants have few, if any, assets left to repay the First Assembly Church of God of Matewan, W.Va. The Matewan church said it invested $199,800 with John S. Holtzclaw and three other Kentucky residents.

The rancorous battle over Herbalife's business practices took a critical turn as the company revealed that it is being investigated by the Federal Trade Commission. Herbalife did not reveal details of the probe, but the Los Angeles nutritional products maker reiterated its long-held position that its business model is sound. The company has been the target of accusations that it operates a pyramid scheme. "Herbalife welcomes the inquiry given the tremendous amount of misinformation in the marketplace, and will cooperate fully with the FTC," the company said in a statement.

The Securities and Exchange Commission is seeking to shut down a network of 25,000 websites, accusing operators of running a $15-million pyramid scheme that promises to shower participants with easy cash. Prosperity Automated System, which bills itself as a marketing network, "is destined to collapse and leave the vast majority of investors with substantial losses," the SEC said Wednesday. The complaint targets the network and its creator, William M. Osterhout of Citrus Heights, Calif.

At least 50,000 Belgians have fallen prey to fraudulent high-yield "pyramid" investment schemes in the past two years and lost more than $160 million, court officials said. "The numbers are very realistic but could rise further," said a spokesman for the prosecutor's office in the northern town of Dendermonde. Dozens of people are under investigation or facing charges over fraudulent pyramid schemes, the spokesman said. But he was unable to say how many people would be prosecuted.

A year ago, activist investor Bill Ackman rocked Wall Street with a $1-billion bet that shares of Herbalife Ltd., the Los Angeles seller of weight-loss and nutrition products, would slide to zero. Herbalife was a "pyramid scheme," bound to be undone by regulators and destroyed, he told the Los Angeles Times and other media outlets Dec. 19. Herbalife shares plummeted 42% in the next five days, hitting a midday low of $24.24 on Christmas Eve. At the time, it seemed that 2013 would be difficult for Herbalife.

Herbalife Ltd. said a Belgian appeals court has overturned a lower court finding that the company operated an unlawful pyramid scheme. Critics of the Los Angeles nutritional products company had said the 2011 ruling in Belgium was evidence that the company improperly rewards its independent sales people for recruiting others into the business. Herbalife said in a statement that a Belgian appeals court ruled that the company's sales model "is in full compliance with the law. " PHOTOS: Top 10 Southern California companies "Herbalife always believed that the first judgment contained factual errors and was based on misinterpretations of its direct-selling sales method, and was confident that the original judgment would be overturned on appeal," Herbalife said in a statement Tuesday.

Herbalife Ltd. shares gained 4% and traded part of Monday above the price they were when hedge fund manager Bill Ackman first accused the Los Angeles nutritional products company of operating a long-running pyramid scheme. The company's stock price plummeted Dec. 19 after Ackman publicly disclosed that he had taken a $1-billion short position against its shares. In the four trading days after Ackman's announcement, the stock fell 43%, reaching an intra-day low of $24.24 on Christmas Eve. Taking a short position involves borrowing shares at a high price and selling them, expecting to repurchase them later when the price falls and thus profit from the decline in stock prices.

This was the last thing Herbalife Ltd. needed. Just as the Los Angeles company appeared to be regaining its footing from a Wall Street hedge fund manager's assault, the company's auditor resigned abruptly because of an alleged insider-trading scandal. Accounting giant KPMG said Tuesday that Scott London, its chief Southern California auditor, had divulged financial information about Herbalife to a friend who then used those secrets to gain an edge in the markets. KPMG fired London, who had supervised Herbalife's audits, and withdrew its approval of the company's financial statements.

Herbalife Ltd. had some good news - and a little bad - as the nutritional products giant released its fourth-quarter results. The good: Sales of its weight-loss and nutritional products increased 20% to $1.1 billion in the quarter, and profit surpassed Wall Street's projections. And the company expects 2013 to be even better. The bad: Herbalife could spend $10 million to $20 million this year in "legal and advisory services" to fend off allegations made by a Wall Street hedge fund manager that it is operating a pyramid scheme.

NEW YORK - It's no longer just a war of words. Corporate raider Carl Icahn has thrown $214 million behind Herbalife Ltd., the Los Angeles-based maker of health foods and nutritional supplements accused of being a pyramid scheme by Icahn's foe, fellow Wall Street tycoon Bill Ackman. Documents filed with the Securities and Exchange Commission on Thursday reveal that Icahn purchased more than 14 million shares and options in Herbalife, a nearly 13% stake that would make him the company's second-largest investor.

Herbalife Ltd. shares rose after a profanity-filled battle on live television between two billionaire investors with vastly different views of the Los Angeles company. Bill Ackman, who has an enormous short position on Herbalife and has called the company a pyramid scheme, and Carl Icahn, who reportedly has a long position on the company, traded personal insults during a nearly 30-minute telephone discussion aired live Friday on CNBC. Icahn called Ackman a "liar" and said: "He's got one of the worst reputations on Wall Street.

Hedge fund Third Point took an 8.2% stake in Herbalife Ltd., becoming the latest firm to bet against hedge fund manager Bill Ackman, who has accused the direct seller of nutritional products of being a pyramid scheme. Third Point, which had about $10 billion under management and is run by financier Daniel Loeb, has purchased 8.9 million Herbalife shares, according to a filing with the Securities and Exchange Commission. Herbalife is fighting allegations made by Ackman, the founder of Pershing Square Capital Management, that it uses inflated pricing, misleading sales information and a complicated incentive structure to hide a pyramid scheme.