Herbalife Rallies After Denying Knowledge of New Investigations

Source: http://www.flickr.com/photos/artonice/

Source: http://www.flickr.com/photos/artonice/

Shares of Herbalife (NYSE:HLF) jumped as much as 10 percent on Monday after the company reported that it has “no knowledge of any ongoing investigation by the DOJ or the FBI” and that it has “not received any formal nor informal request for information from either agency.” The news follows a decline of nearly 14 percent on Friday, which was catalyzed by reports that the Department of Justice and the Federal Bureau of Investigation were investigating Herbalife in relation to allegations made by hedge fund manager Bill Ackman.

Ackman, who manages Pershing Square Capital, has publicly and relentlessly accused Herbalife of operating a fraudulent pyramid scheme veiled behind a multilevel marketing business model. Ackman first went public with the accusation in December 2012, and five months later, his firm took a $1 billion short position on Herbalife stock.

This accusation and activism on the part of Ackman have haunted Herbalife for the past 14 months, and the issue came to a head in March, when the Federal Trade Commission announced that it had opened an investigation into the company. Shares of the nutrient-supply company fell as much as 23 percent on the news over the course of about a week. The stock recovered somewhat between March 21 and April 11, when reports of further investigations by the DoJ and FBI surfaced.

Although the additional investigations may be fiction — we’ll know when there’s official word from the Justice Department and the FBI — the company has already suffered what may be irreparable harm from the hype and fallout of Ackman’s ongoing campaign.

Until the FTC announcement in March, it appeared as though Ackman’s year-long campaign to oust Herbalife as the pyramid scheme he believes it is was going poorly. Despite his conviction and lobbying, he has failed to turn up any credible victims of the alleged pyramid scheme. Regulators generally won’t investigate a company unless there is evidence of wrongdoing, such as the existence of credible victims.

On March 10, The New York Times published an article synthesizing the ordeal to date. Although the piece sidesteps taking a side on the issue, it generally presents Ackman’s extraordinary efforts as lacking merit. Although the synthesis doesn’t fully articulate Ackman’s argument, it does highlight the dubious and, arguably, morally suspect nature of his campaign. That is, it’s strange — if not outright inappropriate — that Ackman is lobbying to effectively topple Herbalife when he has such an enormous financial incentive to succeed.

For the record, should he be successful, Ackman has promised to contribute all of his personal proceeds to charity. This takes some of the sting out of the financial incentive, but cashing in on his short bet will still be a windfall for Pershing Square Capital — and, of course, losing the bet will mean taking a huge loss. Ackman revealed in November that Pershing Square Capital was down as much as half a billion on the position, but the hedge fund manager is known for his commitment to a thesis. He vowed that he would hold the position “to the end of the Earth” and has said that he will continue to fight Herbalife as a personal project no matter what the outcome of the short position.

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