If Herbalife Ltd. (NYSE: HLF0’s) new press release seems too good to be true, it’s because it is. In a statement issued on November 25th, Herbalife flaunts that Michael Johnson, Chairman and CEO, increased his personal shares in the company by engaging “in a net exercise transaction involving 750,000 stock options that were granted to him in December 2004 and were due to expire in December 2014.” Herbalife cited Johnson’s “complete confidence in the continued and future success of the company” as reason for the sudden transaction.
The press release prompted such excitement that the TipRanks team thought there was a bug in the Insider Trading portion of the Herbalife stock page. At the bottom of the page, the purple logos indicate that someone within the company has sold shares while the green logos indicate purchased shares. When a purple logo appeared on November 25th labeled with Michael Johnson’s name, TipRanks was sure there was a miscalculation.
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However, TipRanks found that Johnson’s newfound increased ownership of the company is far from what it seems. Herbalife’s November 25th press release highlights the 750,000 shares purchased by Johnson but neglects to mention that he sold 457,000 shares in the same day for the market price of $41.99 a share.
Johnson had $5,812,500 cash to exercise since he purchased 750,000 shares in May for an exercise price of $7.75. The press release disguises Johnson’s transactions on November 25th as a new investment in Herbalife when he really sold fewer shares at a higher price, ultimately raking in a large profit. This transaction seems suspicious for many reasons:
- Johnson had $5,812,500 to exercise from purchasing 750,000 shares at $7.75 each. To calculate the tax owed, one must multiply 750,000 by $34.25, or the difference between the exercise price of $7.75 and the price that he sold it for; $42.00. The tax is 30% of the product, which comes out to $7,706,250; a very conservative estimate because it assumes the entire sum of cash to exercise is taxable. The tax could also be lower if Johnson paid some taxes when options were granted, or if the exercise is taxed as capital gains at a lower rate. Nevertheless, this conservative tax estimate would still leave Johnson nearly $6.5 million to pocket.
Cash to exercise: 750,000 × $7.75 = 5,812,500
Cash to exercise: 750,000 × $7.75 = 5,812,500
Taxes: 750,000 × ($42 – $7.75) × 0.3 = $7,706,250 [Assuming a 30% tax rate]
Total possible expenses: $13,518,750
Proceeds from stock sale: 457,500 × $42 = $19,971,000
Cash in hand: $6,452,250
- This transaction is labeled in the SEC filing under F, a code used for “Payment of exercise price or tax liability by delivering or withholding securities incident to the receipt.” This is notably different from the code S used in the SEC filing on November 25th.
- Herbalife announced Johnson’s perceived increase in ownership right before Thanksgiving. This timing seems conspicuous as few people are in the office to read the story. One would imagine that such exciting news should be announced at an opportune time when it could garner more publicity.
- Johnson has earned large profits from selling shares of Herbalife in the past. On May 6th, Johnson exercised 250,000 shares for $7.75 each, costing him just shy of $1.94 million. The next day, Johnson proceeded to sell his newly purchased shares for the market price of $60 to $61.88 each for a total of about $15.2 million, earning a quick profit of approximately $13.2 million.
- Herbalife is under fire for pyramid accusations, having just settled a lawsuit in early November for $15 million. Bill Ackman, activist investor and CEO of Pershing Square Capital Management, was amongst those making accusations:
Considering all of these factors, Herbalife’s announcement is too good to be true. Nevertheless, the stock went up 3.3% after the announcement because investors were misled by the conniving press release. Enjoy Thanksgiving with your friends and family but remain wary of Herbalife’s attempt to instill confidence in the company.
Sarah Roden writes about stock market news. She can be reached at [email protected]