Bill Ackman of Pershing Square Capital Management L.P. maintained his conviction that the short position of his hedge fund in Herbalife Ltd. (NYSE:HLF), the multilevel marketing company (MLF) selling nutritional and weight management products offers “extremely compelling and even greater assymetric payoff than before because of substantial increase of the price of the stock."
Ackman reiterated his position about the company in a new letter to investors, one year after he released his presentation regarding Herbalife Ltd. (NYSE:HLF) alleging that it was a pyramid scheme. According to him, since then Pershing Square Capital Management conducted dialogues with foreign and U.S. regulators regarding the illegal business practices of the company.
Ackman submitted presentation to regulators
The hedge fund manager said his firm submitted its presentation about Herbalife Ltd. (NYSE:HLF) to regulators plus additional facts and analysis that were not yet disclosed to the public. Ackman explained that Pershing Square Capital opted to discontinue its public dialogue and instead pursued discussions with regulators regarding the issue because the Wall Street story (battle between Wall Street personalities) was distracting the regulatory community.
Ackman noted that since its presentation, “scores of non-profit and community-service organizations as well as local, state, and federal legislators have come forward to decry” the business practices of Herbalife Ltd. (NYSE:HLF). According to him, last week, the NYPD Hispanic Society demanded that New York Attorney General Eric Schneiderman launch an investigation against the company citing that it is a complex pyramid scheme unfairly targeting independent Latino distributors.
“In our experience, there is a high degree of correlation between the accuracy of a short seller’s arguments and the aggressiveness with which the target company attacks the short seller. In contrast, in cases where a short seller is wrong, the target company typically responds by providing full transparency to the investing public in lieu of attacking the short seller,” wrote Ackman.
Ackman points to extreme Herbalife response
The hedge fund manager pointed out, “Herbalife’s response to Pershing Square is unprecedented in the history of short selling.” He noted that the company spent tens of millions of dollars and hired public relations firms, lobbyists, law firms, investment banks, and paid-spokesperson to attack his firm.
According to him, Herbalife Ltd. (NYSE:HLF) went so far by engaging Moelis & Company in a campaign to convince Pershing Square investors to redeem their investments to force the firm to exit its short position.
Ackman said, “Moelis & Company even offered to stop this campaign if we would agree to no longer push our regulatory agenda and to refrain from any further public statements. We believe that the company and Moelis may have recently abandoned this campaign as a result of media scrutiny.”
He also emphasized that Herbalife Ltd. (NYSE:HLF) should welcome an investigation from the FTC if it is confident that is not in violation of the law instead of lobbying Congress to the stop an inquiry. According to him, a number of former Herbalife employees contacted the hedge fund and shared additional information confirming the illegal business practices of the company.
According to Ackman, Pershing Square Capital Management did not yet disclose additional information and analysis about Herbalife Ltd. (NYSE:HLF) to allow regulators to conduct their own investigation and analysis, which is the primary reason why its presentation during the Robin Hood conference was limited.
Ackman has not disclosed all Herbalife info
“While we believe that our approach has been successful in garnering significant regulatory interest, there has been a substantial short-term economic cost to Pershing Square due to our silence,” said Ackman. He emphasized that Pershing Square Capital Management is known for doing thorough research, and the investors of Herbalife Ltd. (NYSE:HLF) “incorrectly assumed” that his firm already disclosed all negative things about the business of the company.
Ackman also mentioned the latest decision of the Belgian court that Herbalife Ltd. (NYSE:HLF) operates a pyramid scheme under the law of the country. In addition, he also stated that PwC audit showed that a “pyramid schemes can be extremely profitable and generate large amounts of cash, but it does not in any way prove or even suggest that the company operates legally."
Going forward, Ackman said his firm will release additional communications and presentations about Herbalife Ltd. (NYSE:HLF) detailing its analysis and conclusions regarding its investigation over the past 12 months. He said his firm will show that Herbalife’s lead Generation recruiting methods promoted by its top distributors was ostensibly prohibited by the company starting last June 30, its nutrition clubs were in fact used as recruiting venues, and its Chinese operation likely violates the MLM restrictions in the country.