Herbalife Initiated Ackman Investigation As Battle Heats Up

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Herbalife Initiated Ackman Investigation As Battle Heats Up

Is it possible for a company like Herbalife Ltd. to pressure regulators into investigating an activist investor or hedge fund? Of course some would say yes, and others no. But one industry expert tells ValueWalk that it often seems like this is the way investigations like the one linked to activist investor Bill Ackman’s firm and third-party researchers hired by his firm begin.

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Even though this seems to be common practice on Wall Street, it should be noted that it doesn’t mean this is what happened in the case of Herbalife versus Ackman. A source familiar with the investigation tells ValueWalk that Herbalife Ltd. (HLF) was the one that initiated the first meetings with officials regarding Ackman, although the nature of that first meeting is unclear.

SEC cracks down on activists

Recently it was reported that the Securities and Exchange Commission is investigating whether activists team up in targeting a particular company but without the proper disclosures. This highlights how seriously regulators are starting to take the PR shows launched by activists. There is, after all, sometimes a thin line between market manipulation and just honest efforts to warn investors that a particular company might be doing something wrong. Indeed, regulators should be keeping a close eye on activists in some types of cases.

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There is chatter on Wall Street among my sources which suggests that Herbalife might have applied some (how much, if any, is unclear) pressure on regulators to encourage the ongoing investigation linked to Ackman’s firm through subpoenas and interviews with third-party researchers who worked on Pershing’s battle against Herbalife. Pershing Square has not been accused of wrongdoing. One source even suggested that some regulators act as if they are “too scared or uninterested” to rock the boat in the case of Herbalife.

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This is certainly far from being a definitive answer regarding whether Herbalife did or even could pressure regulators, and the suggestion that regulators would be afraid of Herbalife seems like too much. But it does beg the question of “what if?”

It should be noted that no one is pointing the finger at Herbalife in this case. However, an expert told ValueWalk in an interview about the recently reported probe of undisclosed activist alliances that this sort of thing may be happening behind the scenes all the time.

Expert says practice may be common

Former SEC attorney Ron Geffner now heads up law firm Sadis & Goldberg’s financial services segment. When asked whether it’s even possible for companies to exert pressure on regulators, he told ValueWalk that, in general, it seems as if companies being targeted by activist investors do indeed go directly to regulators or investigators.

“It is quite common for an issuer whose security is either being shorted or invested in by activists, in an effort to entrench themselves, many public companies will through various sources put pressure on regulators to examine the activities of the activists with the basis or suggestion that the activists are in the process of manipulating securities or otherwise may be breaking other laws,” said Geffner.

“In half a dozen situations which I’ve experienced in which the activist is the recipient of a subpoena or a letter from a regulator that appears to have been brought about—’appears’ is be the real key word because I don’t have proof—appears to have been brought about by the issuer,” he added.

Herbalife’s responsibilities

One of Herbalife’s supporters, known only as The Skeptic, pointed out that if Herbalife does have information relating to possible wrongdoing in the PR campaign that has been targeting it, then it is obligated to report that information to regulators. It is also Herbalife’s fiduciary responsibility to its shareholders to do everything it can to fully protect itself against allegations raised by anyone. In general though, The Skeptic doesn’t believe Herbalife would be able to pressure officials to launch an investigation. Indeed, it does seem questionable.

The recent New York Times article that suggested Herbalife has met with regulators and the FBI over the last few years brings an important question. Who initiated those meetings? Was it Herbalife or government officials? A source familiar with the investigation told ValueWalk that Herbalife requested the first meeting, which occurred in January 2013. The same source also informed us that Herbalife has met with officials more than the five times reported in The New York Times. The nature of those meetings is unclear. The meetings may simply have been requested to present information to officials with no intent to pressure anyone, and some of the later meetings were apparently requested by officials rather than Herbalife.

A spokesperson for Pershing Square declined to comment for this story. An Herbalife spokesperson provided the following statement to ValueWalk: “We have great faith and confidence in the government’s efforts.”

Lobbying a big piece of the MLM puzzle

Usually neutral on the battle between Herbalife and Ackman, Bill Keep, dean of the College of New Jersey’s Business School, noted that lobbying of all kinds is an important part of doing business for multi-level marketing companies.

“Herbalife and other MLM companies have a long history of effectively lobbying regulators,” he told ValueWalk. “It is a cost of doing business for this industry. Getting regulators to investigate Ackman questions his motivations. Ackman cannot be surprised by this. On the one hand, an investigation of Herbalife helps reassure investors — see, it’s all him; not us. On the other hand, investigations that go nowhere simply become side shows and the focus eventually returns to questions of Herbalife’s business model in practice.”

It’s certainly been no secret that Herbalife and Ackman have been lobbying for their respective sides in the fight, and lobbying can take multiple forms. Indeed, in Herbalife’s case, if information has been passed to regulators, as sources have suggested, the company’s proponents could also argue that it was simply part of the company’s lobbying efforts.

Can Herbalife placate short-sellers?

Vijay Marolia of Regal Point Capital Management, whose short position on Herbalife has been well-documented, suggests he would be convinced of Herbalife’s innocence if management releases one specific piece of information:

“What keeps getting missed is perhaps the simplest to comprehend,” he told ValueWalk in an email. “The truth is that HLF could and should reveal a breakdown of their retail sales which would solve the entire drama once and for all… The fact that they would rather spend more money fighting a supposedly false claim that should be entirely refutable does not say much for management’s concern for shareholder value. “

Do Herbalife’s business model changes matter?

Quoth the Raven, who recently identified himself as Chris Irons known for his short position on Herbalife, thinks that the MLM company has made progress in transforming its business model. However, he also thinks that it’s too late to change because he believes the company has been “caught with its hand in the cookie jar.”

In other words, he thinks Herbalife should be held accountable for what happened in the past even if the company has remedied prior questionable policies.

 

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Michelle Jones is editor-in-chief for ValueWalk.com and has been with the site since 2012. Previously, she was a television news producer for eight years. She produced the morning news programs for the NBC affiliates in Evansville, Indiana and Huntsville, Alabama and spent a short time at the CBS affiliate in Huntsville. She has experience as a writer and public relations expert for a wide variety of businesses. Email her at Mjones@valuewalk.com.
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13 COMMENTS

  1. When you have reviewed all/most of his picks, then you would have a point. Herbalife isn’t over, and I know things about Herbalife that aren’t public knowledge, yet. Ackman was the #1 hedge fund last year, and his 10 year record ranks near the top as well. Why do you think “Ackman’s career is taking a turn for the worse…”?

  2. The only right pick I have seen from QTR so far is AAPL. That was identified late in the game. Other than that every other pick of his on Seeking Alpha has been pretty lame. He didn’t even know how options worked based on his commentary. Now he has lost a bundle betting against Herbalife. The worst part is that he wasn’t really betting against Herbalife so much as trying to bet with Bill Ackman. What horrible timing, just as Ackman’s career is taking a turn for the worse…

  3. This article is rubbish. Example: “Former SEC attorney Ron Geffner … told ValueWalk that, in general, it seems as if companies being targeted by activist investors do indeed go directly to regulators or investigators.”
    Herbalife has been viciously attacked by Ackman since 2012. Finally in 2015 we hear about an investigation targeting his tactics. Not my definition of “directly” responding.
    Stock has risen more than 39% so far in 2015. The market is not buying what Ackman is selling. Period.

  4. The non-distributor addresses are called Nutrition Clubs. The ultimate user term is a red herring. The right question is whether the primary source of profit is from sales to non-distributor customers. Herbalife tries to muddy the waters with claiming most distributors just want discount pricing…then why not offer discounts to customers and see what happens to their volume? Herbalife operates very similar to Amway, the largest MLM scam on the planet. Read about both of them here: http://www.StopTheAmwayToolScam.wordpress.com and forward the information to every non-Amway person you know, so they don’t get scammed. When enough people know, these scams will collapse.

  5. Pay attention,,,,, 32% right out of the warehouse to non-distributor address’s. All the rest of the direct sales by distributors and the distributors consumption,add in the nutrition clubs and we come up with a good number. Not that this is the right question anyway. The correct question is – Does Herbalife primarily pay upline commissions on sales to the ultimate user?IMHO Herbalife has plenty of sales to the ultimate user to cover all commissions entirely.

  6. Why anyone would take the time to seek out QTR’s opinion on anything is beyond me. The guy’s flawed analysis had him and his lemmings shorting Netflix @ $ 170 share while it’s now north or $ 600 @ share. Let alone his pump and dump backround.

  7. Yes Herbalife is a legitimate MLM and we are getting to an end with Ackman’s stubborn and selfish intentions $$$$$
    Nobody talks the positive side which is greater than all the rumors and propaganda against the Company.
    Im sure by next year exactly by this month the stock would be touching 100’s
    wise investment? Of course get in while is cheap!

  8. The bottom line is that HERBALIFE (HLF) has millions of satisfied customers!!!
    Herbalife has millions of people buying their nutritional products EVERYDAY, because millions of people have found a better nutrition source!!! Herbalife’s Healthy Nutritional Shakes are the #1 best seller in the world.

    Pure smear campaign by this author and Ackman. Tell us what law has HLF broken? HLF is operating legally in all 90+ countries! FTC decision will NOT adversely affect HLF and STOCK WILL SHOOT TO 80+ SOON

Comments are closed.