Shares of Herbalife Ltd (HLF) rose 4.3% yesterday after the nutritional supplements seller responded to the allegations from activist investor William Bill Ackman, hedge fund manager of Pershing Square.
Ackman, in an interview to CNBC, made critical comments against Herbalife and compared it with Bernie Madoff. Madoff is a former American stockbroker, investment advisor, and financier, but was convicted of fraud in 2008, which is considered to be the largest financial fraud in U.S. history.
In response, Herbalife stated that the allegations of Ackman are very much predictable as his put options in Herbalife are expiring next week and therefore he is trying every tactic to drive down the share price of the company.
Ackman held a $1 billion short position in the company's shares in 2012 and since then has been keeping an eye on Herbalife as it believes that the company is making money by recruiting new sales people and not from its sales. Per Ackman, the company is running a pyramid scheme business model. i.e. it employs deceptive marketing practices for improving business. (Read: Herbalife Faces Another Ackman Attack).
Last month too, Ackman stated that he has evidence in the form of videos that back his allegations against Herbalife. Per reports, in the video obtained, a top Herbalife salesman has stated that most people who sell the company's weight loss and nutrition products are doomed to fail. Another video dated Dec 11 stated that some of Herbalife distributors have been making false and fraudulent claims about the health benefits of its products. (Read: Herbalife Hits 52-Week Low on Ackman's Fresh Accusations).
Herbalife, on its part, has been denying the charges since 2012 and has full confidence in its business model. However, Ackman's back-to-back allegations have prompted investigations by the Securities and Exchange Commission, the Federal Trade Commission, the Federal Bureau of Investigation and at least two state attorneys general. But so far none has taken action. However, these accusations have immensely impacted the share price of the company, which tumbled nearly 50% in 2014. We therefore remain unsure about the long-term prospects of this Zacks Rank #3 (Hold) company due to Ackman’s continuous attacks on Herbalife’s business model.
Herbalife is not the only company, which employs sales representatives to sell its products. Other multi-level marketing companies like Nu Skin Enterprises Inc. (NUS), USANA Health Sciences Inc. (USNA) and Avon Products Inc. (AVP) also follow the same distribution model.
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