SEC dropping Herbalife insider-trading case after witnesses leave U.S.

The Securities and Exchange Commission is dropping an insider-trading case against a man who was tipped off to Bill Ackman’s bearish bet on Herbalife stock.

The SEC is seeking to withdraw its case against Jordan Peixoto because two essential witnesses left the U.S. for Poland and are unavailable to testify, according to a filing by the agency’s staff in administrative court Monday.

Peixoto learned about Ackman’s $1-billion short position in Herbalife from his friend, Filip Szymik, who lived with an analyst at Ackman’s Pershing Square Capital Management, the SEC said in September. Szymik and the former analyst, Mariusz Adamski, are childhood friends who grew up in Poland, according to the agency.

“There were significant legal and fact problems with this action that cried out for this dismissal,� Derrelle Janey, Peixoto’s lawyer, said in a statement. “The division of enforcement should be applauded for doing the right thing.�

The change of course comes about a week after the U.S. Court of Appeals in Manhattan tossed out insider-trading convictions of two traders, ruling that in order to be guilty, they must know that the insiders who leak information are doing so in return for “personal benefit.� The decision has cast questions about cases against individuals who aren’t directly connected to the insider.

The SEC declined to comment beyond the filing.

Ackman, who accuses Herbalife of being a pyramid scheme, is waging a battle to shut the maker of diet supplements and profit from a drop in its share price. The Federal Trade Commission is investigating the Los Angeles company’s practices.

Herbalife, which sells products in more than 90 countries through a network of independent distributors, has repeatedly denied Ackman’s allegations.

Herbalife shares fell $1.63, or 4.2%, to $37.16 on Monday.