By now, you’ve probably heard what hedge fund manager Bill Ackman, manager of Pershing Square Capital, reportedly thinks of Herbalife Ltd. (NYSE:HLF)‘s business model. Originally reported by CNBC’s Maneet Ahuja and Kate Kelly, “Bill Ackman is short the nutritional-supplement seller,” and “has told people he considers the business to be little more than a “pyramid scheme.””
These claims are “according to someone familiar with the matter,” so it’s not exact clear who was responsible for the leak, but the source did say that Ackman “put on the bearish Herbalife position about seven or eight months ago.”
In response to the reported position, shares of Herbalife fell by more than 12% in trading today, and further losses were seen after hours.
For those who don’t remember, fellow billionaire David Einhorn was inadvertently involved with a Herbalife scare earlier this year, when the Greenlight Capital hedge fund manager simply asked a few intelligent questions on the company’s earnings call. Einhorn’s questions were over disclosure, and were cleared up, but Herbalife investors were worried that the infamous short seller was short.
He has not disclosed a short position in the time since, but judging by the market’s reaction to Bill Ackman’s reportedly bearish sentiment toward the stock, investors are still a bit testy.
Why exactly is that the case? It may have to do with one particularly intriguing court case late last year.
A commercial court in Belgium ruled in November 2011 that Herbalife’s operations in that country were a “pyramid system,” though the company calls it a “multi-level” sales system.
It must be said, however, that the Federal Trade Commission has investigated the company on multiple accounts, each time deciding that no wrong-doing has occurred, failing to come to the conclusion that Herbalife did not engage in direct selling — a major complaint of most bears. Moreover, the FTC hasn’t found Herbalife guilty of any missteps regarding its customer/salesperson classification.
All in all, the company has been found guilty of nothing in the United States, and Herbalife CEO Michael Johnson was on CNBC earlier today calling Ackman’s allegations “blatant market manipulation.” He had quite a few other things to say as well. You’ll want to continue to the next page.