Pershing Square Capital Management was one of the best performing hedge funds of 2014, returning more than 40% last year. With key holdings in companies such as Allergan, Air Products, Zoetis, and Restaurant Brands, Bill Ackman's fund strongly outperformed the broader S&P 500.

But one of Ackman's more interesting (and certainly divisive) positions is his bet against Herbalife (HLF 2.00%), a multi-level marketer and producer of consumer products. For more than two years, Ackman has been waging an all-out war against the company, accusing it of running an illegal pyramid scheme, and prodding lawmakers to take action against the firm.

But has he crossed the line? On Thursday, The Wall Street Journal reported that the FBI has been interviewing people close to Ackman, investigating the possibility that Herbalife shares may have been manipulated.

What is stock manipulation?
It's illegal to manipulate a stock by making statements that are intentionally false or misleading. That comes from Rule 10b-5 of the Securities Exchange Act of 1934, which declares it unlawful to "make any untrue statement of a material fact ... in connection with the purchase or sale of any security."

In other words, it's illegal to short a stock and then lie about the company with the intent to drive its share price down -- which, in this case, may be what prosecutors are investigating. According to the Journal's report, the probe centers around individuals and agencies advocating against Herbalife on Pershing Square's behalf -- not the fund itself. In an interview on CNBC Friday, Ackman said that no one at his fund had been contacted by federal agents, but admitted that several people working for Global Strategy Group -- a consulting firm he had hired to lobby on his behalf -- had received subpoenas.

It's possible that these individuals made intentionally false statements to regulators, but Global Strategy Group denied any wrongdoing, declaring that it has "never made false statements about Herbalife."

In an interview with Fox Business, Ackman dismissed the possibility that Global Strategy Group had crossed the line, noting that his own statements against the company have been so severe that they would be difficult to top. "We have gone out publicly ... [and said] this company is a pyramid scheme -- it's a criminal enterprise. We've said ... it's taking money [from poor people.] ... I don't know what worse you can say about a company. I can't even conjecture what someone could say that's false, that's worse than what I said."

Herbalife faces its own investigations
It's not surprising that Herbalife shares rallied more than 8% on Friday. Since Ackman disclosed his short position in Dec. 2012, its earnings have taken a back seat. Profitable or not, shareholders could be wiped out literally overnight if the many government agencies investigating the company side with Ackman.

But if Ackman's case against the company is bunk -- if it's a completely legitimate enterprise, it may be undervalued. Suspicion of any wrongdoing on Ackman's part, or the people working for him, lends credence to this notion. Still, the Journal's report is far from definitive, and ironically, may ultimately work in his favor. The worst-case scenario for Ackman would've been no investigation at all -- if regulators had simply turned a blind eye toward Herbalife, as they'd been doing for decades, shares could've continued to rally higher despite Ackman's attacks.

But it's clear that regulators have an interest in the company, and the debate surrounding it. The Federal Trade Commission, which has a history of targeting pyramid schemes masquerading as multi-level marketers, is currently investigating Herbalife, as are several state attorneys general.

With so much regulatory uncertainty, Herbalife is a company most investors should avoid.