Herbalife Ltd. (NYSE:HLF) : Media Materially Misstates FTC Outcome, Icahn Files Potentially Questionable Statement with SEC by QTR
FTC Commissioner Ramirez stated during Friday’s 10AM press conference that press reports claiming the “FTC confirmed Herbalife to not be a pyramid scheme” were inaccurate
The misleading statement that “the FTC concluded Herbalife was not a pyramid scheme” was in an early morning Carl Icahn press release, subsequently filed with the SEC in a 13D/A
MLM attorney and advocate for the industry Kevin Thompson stated that this settlement “does not represent the end of the FTC process with Herbalife”
Adamant Herbalife long John Hempton noted on his blog and on Twitter that “If Herbalife is a pyramid scheme, the conditions imposed will cause it to collapse”
Substantive risk remains as FTC and Pershing Square engage international jurisdictions with the agency’s findings and the SEC concludes its investigation into the company
Matt Goldstein, New York Times: “Did you review the language in that press release that sort of affirmatively said that they were not declared to be a pyramid scheme? Because they’re sort of touting that as an outright victory.”David Abrams Explains How To Value Stocks
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FTC Chairwoman Edith Ramirez: “I do not agree with that statement. The word ‘pyramid’ does not appear in our complaint, that is true. But, again – the core facts that we’ve alleged, that we consider to be problematic with their compensation structure are set forth in detail in our complaint and again I will leave to readers to draw their own conclusions – but they were not determined not to have been a pyramid. That would be inaccurate.”
Matt Goldstein, New York Times: “OK, so you don’t endorse their statement in the press”
FTC Chairwoman Edith Ramirez: “I do not endorse that statement.”
The Biggest PR Con Job I’ve Ever Seen
On the morning of Friday, July 15, at around 7:43AM EST, headlines that were later in the day proven to be misleading crossed the newswire courtesy of Dow Jones. When the initial headline broke, despite being retracted later in the morning, it was too late: the message had spread like wildfire – and it was downright “inaccurate” to use FTC Chairwoman Edith Ramirez’s terms.
Dow Jones headlines claimed that the FTC had determined “Herbalife is not a pyramid scheme”. The headlines were then picked up by every news outlet in the world, and were disseminated similar to the way Benzinga and others pushed them onto their millions of Twitter followers and website visitors. Here’s an example of what the narrative was at 7:43AM Friday morning:
Imagine the public’s surprise when FTC commissioner Edith Ramirez got in front of a room at a press conference at 10AM EST and, when confronted that the FTC complaint essentially defines a pyramid scheme, said that “they were not determined not to have been a pyramid. That would be inaccurate.” Also imagine the surprise of those like myself, who actually read the lawsuit that was to be filed against Herbalife. While the lawsuit does not contain the words “pyramid scheme”, point 148 states:
Did Carl Icahn Negligently or Recklessly Violate Securities Laws?
It is not often that reporters should be forced to give up their sources. However, in a case like this where Dow Jones’ source may have clearly offered false and misleading information that materially affected the price of the company’s stock, I believe that the SEC Enforcement division has a duty to investigate where this headline originally came from, and whether or not 18% owner Carl Icahn violated securities laws by filing with the SEC and releasing a press release to the public that stated: Unlike many of those that “shorted” Herbalife, we did not rely on one or two research papers prepared by non-experts. As a result of our research, over three years ago we concluded that Herbalife was not a pyramid scheme. The FTC settlement announced today, coming after a two-year investigation also concluded that Herbalife is not a pyramid scheme – a conclusion that obviously vindicates our research and conviction.
I believe this is clearly misleading information and that it appears negligent and may possibly rise to the level of recklessness as relates to securities law and Icahn’s ownership position in Herbalife. This is a crucial concept because – again – the question of whether or not the company is a pyramid scheme is arguably the most material piece of information that will potentially come forth over the lifespan of the company. It is material and needs to be handled in a mindfully delicate and respectful manner, paying excruciating attention to the smallest of details. It is the lynchpin of the company’s survival, not some random estimate or paraphrase that leaves room for interpretation.
I will be the first one to admit that over the course of the last three and a half years, I have paid attention to every microscopic detail about this saga. But the one detail that absolutely cannot be misconstrued or obfuscated are the FTC’s findings about the company.
Reading the FTC complaint makes it clear that the commission sides with the assertions of those in the bear camp and those detailed in Bill Ackman’s original presentation. The price of the stock, however, makes it clear that the market has yet to fall in line and agree with the same. On a factual basis, bears are winning. On a stock price basis, bears have not had success.
The FTC complaint and the stipulation entered into by both parties can be viewed here. The complaint is a scathing review of the company’s business practices and proves Ackman and critics of the company correct on almost any and all allegations they have made against the company.
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