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5 Years of Herbalife Ltd. (HLF) Drama in Review

The Herbalife Ltd. (NYSE:HLF) debacle has become, for most, an overplayed tune heard on CNBC and read in The Wall Street Journal. Though it’s barely a month old, the controversy surrounding the multi-level marketer aged like Phyllis Diller. The drama has been steaming ahead since mid-December, but before Ackman’s near 400-page slam report, there were SEC investigations, as well as another mega money manager casting doubt on the stock. Following Ackman’s move, more all-stars have weighed in on the most hotly debated pick since the Facebook Inc (NASDAQ:FB) crisis. Honestly, it can all get a little confusing to remember who’s for and who’s against. Take a look at this timeline of events to make sure you are clear and up to date on the protein-powder-fueled battle.

Please, no more
Herbalife Ltd. (HLF)As I mentioned in a recent article, my investment advice regarding Herbalife is to stay away — whether it’s long or short. There is way too much heat surrounding this company for any retail investor to touch with any degree of certainty. Sure, multi-level marketing companies are the used-car salesmen of corporations, but that doesn’t mean Wall Street will ignore the profitability. As the situation clears, an opportunity may present itself — but this requires keeping a very close eye on every development. Let’s see if we can put the story into the always favorable bullet point format:

  • November 2007: Herbalife discloses that the Los Angeles branch of the SEC opened an inquiry into the company’s practices.

Here, the SEC’s L.A. office questioned the use of products by independent distributors (a big part of Ackman’s presentation as well). The enforcement agency also investigated the a suspicious trade from a mid-level employee. The investigation as concluded with the decision to not press further.

  • November 2011: The Commercial Court in Belgium decides that Herbalife is an illegal pyramid scheme.

For whatever reason, this hasn’t often been mentioned by the media, but in my opinion, it certainly should be. The company was ordered to change its practices and pay fines.

  • May 2012: Famed short-seller David Einhorn casually asks some questions on an Herbalife conference call; stock plummets.

Though the money manager did not disclose whether he held a short position in the company, many assumed he did after asking a couple suggestive questions. Einhorn asked what percentage of Herbalife’s products are sold to consumers and not just to distributors. The company could not answer. He also asked why and how in the previous year’s 10-K, the company disclosed three tiers of distributors and how much product they represented. The first was self-consumers (27%), small retailers (57%), and sales leaders (14%). Herbalife management said it assumed these three tiers based on the distributor’s volume purchases, and in the latest 10-K had determined the numbers were not material to investors.

Herbalife seemed caught off guard, and the stock tanked before recovering a short while later. We did not hear from Einhorn again regarding the stock.

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