Bill Ackman sent a very lengthy letter to PWC regarding Herbalife Ltd. (NYSE:HLF) regarding auditing practices. The letter was sent by Ackman’s Pershing Square Management and was obtained by ValueWalk via email from Whitney Tilson. Below is a brief summary from Tilson followed by the entire letter in scribd.

Herbalife Ackman

Attached is Bill Ackman’s latest salvo against Herbalife. I’ve deliberately not engaged in this war and don’t intend to write or speak about it further because a) it’s such a war and b) I don’t need the brain damage, but I’m convinced that Ackman is right that it’s a pyramid scheme. It’s a very clever one, however, because there’s just enough of a legitimate business that anyone who’s predisposed to conclude that it’s legitimate (or just wants to stick it to Ackman – see Icahn, Carl) can easily find evidence that there are some real sales and consumption. But as Charlie Munger once famously said: “If you mix raisins and turds, they’re still turds.”


Of course it’s possible that HLF could be a pyramid scheme, but not be a good short. For the short to work, one or both of the following must happen:


a) There’s a slowdown in the number of new suckers/victims that are needed to enter the bottom of the pyramid each year to maintain it, perhaps because the truth about HLF becomes widely known or the law of large numbers catches up with HLF; and/or

b) Regulators/auditors must act to rein in HLF.

I think the latter is more likely, but I don’t think it’ll be a sudden thing – for example, how regulators shut down Fortune Hi-Tech Marketing (see: Rather, I think it’s more likely to play out like the for-profit ed industry, where a combination of running out of suckers combined with more scrutiny and tighter regulation resulted in this stock chart of the past two years of ESI, APOL and CECO:

HLF-Pershing Sq. Ltr to Pricewaterhouse-8!29!13 Herbalife Ackman by