Activist investor William Ackman is bracing for possible litigation from Herbalife (HLF), the nutrition company that he has labeled a “pyramid scheme” with a stock price that should fall to “zero,” FOX Business has learned.

Ackman’s attorneys believe the possible lawsuit could be filed at or before Herbalife is scheduled to hold its much-anticipated investor day in New York on Thursday.

At the heart of Ackman’s accusations is the charge that Herbalife makes the vast majority of its money through opaque deals with distributors who pay Herbalife fees rather than through the actual sales of products.

Ackman is calling for the Federal Trade Commission to close down Herbalife, alleging it’s an illegal pyramid scheme that will eventually implode once the company runs out of distributors to attract.

If filed, the lawsuit could involve alleged “tortuous interference,” implying Ackman intentionally damaged Herbalife’s business relationships, people close to Ackman said.  On Tuesday, a large Herbalife distributor said he was leaving the company and called on other distributors to join him amid the controversy.

In a sign of the importance of its distribution channels, Herbalife says in regulatory filings its relationship with and ability to influence distributors are items that can “materially” affect its financial condition.

As of late Tuesday, people with knowledge of the matter said no decision on timing or even if a lawsuit will actually be filed had been made. The company has told FOX Business it is weighing legal action against Ackman. Ackman declined to comment on the matter.

Herbalife has hired famed attorney David Boies to launch possible litigation against Ackman as well as the investment bank Moelis & Co., as its financial adviser.

Shares of Herbalife have plunged nearly 40% since Ackman announced that he was “shorting” the stock, thus betting it would decline in value, as he vocally questioned the validity of the company’s business model.

Since then shares have gained back some ground particularly after a large shareholder, Robert Chapman, of hedge fund Chapman Capital defended the company and said the stock comprises as a 35% position in his fund.

Chapman moved the stock higher Tuesday after telling the FOX Business that Herbalife is preparing to release a “big story” in its battle with Ackman. Shares of Herbalife rose 4.9% Tuesday to $38.35 and continued rising in extended trading.

Chapman declined to provide details on the story, but people close to Ackman said they believe it could involve litigation that will be announced at the Thursday morning investor meeting where the company led by its chief executive Michael Johnson will rebut Ackman’s charges.

Boies, who represented the government in its landmark anti-trust case against Microsoft, is also scheduled to appear at the Thursday meeting.
 

Charles Gasparino joined FOX Business Network (FBN) in February 2010 as Senior Correspondent.

Follow Adam Samson on Twitter @adamsamson.