These claims are “according to someone familiar with the matter,” so it’s not exact clear who was responsible for the leak, but the source did say that Ackman “put on the bearish Herbalife position about seven or eight months ago.”
In response to the reported position, shares of Herbalife fell by more than 12% in trading today, and further losses were seen after hours.
For those who don’t remember, fellow billionaire David Einhorn was inadvertently involved with a Herbalife scare earlier this year, when the Greenlight Capital hedge fund manager simply asked a few intelligent questions on the company’s earnings call. Einhorn’s questions were over disclosure, and were cleared up, but Herbalife investors were worried that the infamous short seller was short.
He has not disclosed a short position in the time since, but judging by the market’s reaction to Bill Ackman’s reportedly bearish sentiment toward the stock, investors are still a bit testy.
Why exactly is that the case? It may have to do with one particularly intriguing court case late last year.
A commercial court in Belgium ruled in November 2011 that Herbalife’s operations in that country were a “pyramid system,” though the company calls it a “multi-level” sales system.
It must be said, however, that the Federal Trade Commission has investigated the company on multiple accounts, each time deciding that no wrong-doing has occurred, failing to come to the conclusion that Herbalife did not engage in direct selling — a major complaint of most bears. Moreover, the FTC hasn’t found Herbalife guilty of any missteps regarding its customer/salesperson classification.
All in all, the company has been found guilty of nothing in the United States, and Herbalife CEO Michael Johnson was on CNBC earlier today calling Ackman’s allegations “blatant market manipulation.” He had quite a few other things to say as well. You’ll want to continue to the next page.
Here’s what he had to say (emphasis added):
“First of all guys, this isn’t about Herbalife’s business model, this is about Bill Ackman’s business model. This is wrong. This is totally wrong what’s taking place. Where’s the SEC protecting the individual shareholder right now? This is blatant market manipulation. This appears to be another attempt to illegally manipulate the market by a group of short sellers.
More specifically, Johnson discussed the peculiar short positions that he and his team were aware of, saying (emphasis added):
“Here’s what we know […] an extraordinary number of puts on our stock were due to expire this Friday. We previously learned this activity was pegged at some kind of “significant event.” Mr. Ackman suddenly announces he will make a presentation on Herbalife on Thursday, the day before the puts expire […] Now we know that this has been going on for – in the shadows as we say – for the last eight months”
Johnson adds that bears “need to come out and […] see our customers […] see the way that our business is put into the marketplace,” calling claims of a pyramid scheme “a ridiculous assertion,” adding that “90 percent” of revenues are derived from outside the company’s distribution system.
Finally, he mentioned that “we want the SEC to take action.”
You’ve seen both sides of the argument, and there’s not much more to report until Ackman’s presentation at the Sohn Conference Foundation tomorrow morning. It’s notable that according to the original CNBC article, Bill Ackman believes that Herbalife is “the most compelling short case for a stock he has “ever seen,”” so we’ll have to wait and see. In the meantime, check back at Insider Monkey for updates.
