herbalife-logoNews broke yesterday that an individual had been subpoenaed to appear before a grand jury in New York.

This particular convening of a grand jury is significant because it involves an investigation related to Herbalife.

As best as I can tell, the grand jury news was broken by the Hartford Courant. Before we get into the specifics of yesterday’s news though, let’s recap what we currently know.

Four days ago I ran an article discussing the revelation that the FBI had now launched their own Herbalife investigation.

The FBI and other federal authorities have interviewed people hired by activist investor Bill Ackman as part of a probe into potential manipulation of Herbalife stock.

The probe is looking into whether people, including some hired by Ackman, made false statements to regulators and others about Herbalife’s business model, the Journal reported.

The false statements were made to spur investigations into Herbalife and lower its stock price, according to the report, which cited people familiar with the matter.

As part of the probe,

Preet Bharara’s US Attorney’s Office in Manhattan have conducted interviews and sent out document requests.

At the time it was also reported that’neither Ackman nor Pershing Square is under investigation‘.

So to recap, we know the investigation has something to do with Herbalife… but without further clarification from either the FBI or the Manhattan US Attorney’s Offtice, we’re not exactly sure what.

Neither the Bharara’s Office or the FBI chose to comment on the investigation, so we don’t have anything more than that.

Enter the Hartford Courant, who yesterday wrote that Israel Alvarez had been subpoenaed to appear before a grand jury last month.

Who is Israel Alvarez?

One of the firms Bill Ackman hired to assist him in his campaign against Herbalife is Global Strategy Group.

The firm is registered to lobby in Connecticut for Ackman’s Pershing Square Capital Management fund.

As part of their engagement in Ackman’s campaign, Global Strategy Group hired a sub-contractor to put together a letter-writing initiative.

This initiative saw individuals mail letters critical of Herbalife to government regulators, with the aim of instigating a regulatory investigation into the company.

One of the government officials targeted was Connecticut Attorney General, George Jepsen.

About 30 letters or other complaints critical of Herbalife reached Jepsen, who made them public last week in response to a Freedom of Information request. Some are so similar that an investigator who has examined them suggested they are form letters.

One of the letters carries the signature of Israel Alvarez, a hair stylist and owner of Hair by Israel on Lewis Street in Hartford.

And it is this same Israel Alvarez who was subpoenaed last month.

Alvarez was subpoenaed late last month to appear before a federal grand jury in New York, according to a lawyer familiar with the matter.

Alvarez said he has been instructed by federal authorities in New York not to discuss the matter.

For those unfamiliar with a grand jury proceeding,

A grand jury may issue an indictment for a crime, also known as a “true bill,” only if it finds, based upon the evidence that has been presented to it, that there is probable cause to believe that a crime has been committed by a criminal suspect.

Grand jury proceedings are secret. No judge is present; the proceedings are led by a prosecutor; and the defendant has no right to present his case or (in many instances) to be informed of the proceedings at all.

While court reporters usually transcribe the proceedings, the records are sealed.

In response to questions regarding their conduct, Global Strategy Group told the Hartford Courant

“It is our clear understanding that we are not a target of any investigation, and we are confident that all our work surpasses the highest legal and ethical standards,” a Global Strategy spokesman said in a statement.

“We spoke with the government and provided full transparency into all of our efforts. GSG has never made false statements about Herbalife, nor do we believe anyone else has either.”

So the big question now is who is the subject of the grand jury proceedings?

It might seem to have something to do with the conduct of those acting on Pershing Square’s behalf, but even that is murky waters.

Legal experts have said that making statements that tend to discredit a company, even if those statements turn out to be false, does not necessarily amount to market manipulation.

What matters in the legal analysis is the alleged manipulator’s intent.

No one has been charged in connection with the Herbalife campaign.

Ackman and Pershing have been meticulously transparent regarding the intent of their campaign against Herbalife. They have a billion dollar short on the company and stand to profit if the share price drops.

Which it will if a regulatory investigation finds Herbalife to by a pyramid scheme.

Pershing Square have also been meticulously transparent in the sharing of data, with everything they’ve based their public campaign on being made readily available by the firm itself.

As to third-parties they’ve hired, I find it hard to extend their motives beyond “they were hired to assist Pershing”. Certainly none of the third-parties hired by Pershing Square would appear to, at least on the surface, have a personal motive to see Herbalife investigated.

You’ve got Pershing Square, who hired a third-party who subcontracted out work to an individual who then organized a letter-writing campaign to various government officials.

Where’s the grand jury proceedings in that?

At this stage I’m not discounting someone from Global Strategy Group (or one of their sub-contractors) from being the subject of the grand jury proceedings, but I think we can safely rule out Ackman and Pershing Square.

In televised interviews last week, Ackman said his criticism of Herbalife is not connected to his fund’s short position.

Should the stock fall and his bet pay off, Ackman said he will donate any personal profit to charity.

Stay tuned for any updates as they come to hand, otherwise it looks like we might have to wait for the proceedings to finish before we find out anything further – and even then only if an indictment is handed down.

Murky waters indeed!