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New York - Noted Hedge Fund Manager Says 'Herbalife' Is A "Pyramid Scheme"

Published on: December 20, 2012 11:59 AM
By: Reuters
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New York - Hedge fund manager Bill Ackman, best known for taking big positions in stocks in hopes of pushing for management changes, is taking on weight management Herbalife Ltd as his big end-of-the-year short.

A day after confirming that his $11 billion Pershing Square Capital Management is betting against the company, the manager outlined his case for shorting Herbalife shares in a presentation entitled, ‘How to be a millionaire.’

During a talk on Thursday before an audience of 500 at an event sponsored by a charitable group, Ackman said Herbalife is a “pyramid scheme” that has “grown remarkably rapidly” without demonstrating “much substance” to justify the growth.

He criticized the company for inflating the suggested retail price of its products and overstating its retail sales in public filings.

Shares of Herbalife, which tumbled 12 percent Wednesday after Ackman confirmed his hedge fund was shorting the stock, fell another 6.4 percent to $34.94 on Thursday morning on the New York Stock Exchange.

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On Wednesday, Herbalife Chief Executive Michael Johnson said Ackman’s charge about being a pyramid scheme was “bogus,” and he criticized Ackman for using a public attack on his company to benefit his “business model.”

Ackman said he has been building his short position in the company’s stock for several months, adding that his fund is only short the company’s shares and not engaged in any options trading, such as buying put options on Herbalife.

A put option permits a trader to buy a stock at a specific price. It is typically used by short seller to buy a stock after it has fallen in price.

To date, Ackman is the first high-profile hedge fund manager to say he is shorting shares of Herbalife and has problems with its business model.

The company relies on sales of its weight management and nutrition supplements through a distribution channel involving 2.7 million sponsors in 81 countries.

The distributors make money based not only on their own product sales to consumers but on the sales of those they sponsor and bring into the business.

Earlier this year, it was believed that David Einhorn, another noted hedge fund manager, was shorting shares of Herbalife after he went on a company conference call and asked about the percentage of sales to consumers who are not official distributors.

Einhorn declined to comment on Wednesday about his position.

Another well known investor believed to be shorting Herbalife is Jim Chanos, president and founder of Kynikos Associates, according to a person familiar with the hedge fund manager.

A person familiar with the thinking of some short sellers said multilevel marketing companies begin operating like a pyramid scheme when most of their sales are to other distributors of the product, as opposed to people who have no connection to the company.


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1

 Dec 20, 2012 at 12:17 PM akshapero Says:

It has been an over priced Multi level marketing scheme for over 30 years.

2

 Dec 20, 2012 at 12:34 PM enlightened-yid Says:

Is the product at least real or flavored flower passed as weight-loss?

3

 Dec 20, 2012 at 12:54 PM Anonymous Says:

"A put option permits a trader to buy a stock at a specific price. It is typically used by short seller to buy a stock after it has fallen in price."
I believe this is incorrect.As far as I know a put option allows you to sell at a fixed price even though the price is lower. Why would I need an option to buy a stock after its price is fallen. When a price falls I will take the cheaper market price to buy a stock.

4

 Dec 20, 2012 at 01:00 PM yaakov doe Says:

I thought this was common knowledge.

5

 Dec 20, 2012 at 01:19 PM Babishka Says:

It's a total scam.

6

 Dec 20, 2012 at 01:35 PM The_Truth Says:

This is the same as most "multi-level marketing" schemes - there is very fine line between them and pyramid selling - which in my opinion are all one and the same - a fraud.

7

 Dec 20, 2012 at 02:18 PM the_maivin Says:

How can I short 'ambit energy'?

I pyramid scam that has thousands of haimeshe yiden caught in its web.

8

 Dec 20, 2012 at 03:18 PM PashutehYid Says:

Reply to #3  
Anonymous Says:

"A put option permits a trader to buy a stock at a specific price. It is typically used by short seller to buy a stock after it has fallen in price."
I believe this is incorrect.As far as I know a put option allows you to sell at a fixed price even though the price is lower. Why would I need an option to buy a stock after its price is fallen. When a price falls I will take the cheaper market price to buy a stock.

It was incorrect. A put option allows one to sell a stock at fixed (higher than market) price, even if if stock is worth much less. However, if the stock does not fall, the one who bought the put will be left with worthless paper after it expires, typically in a certain number of months.

9

 Dec 20, 2012 at 03:19 PM PashutehYid Says:

However, obviously Ackman is a strong nogea badavar (has conflict of interest) now.

10

 Dec 20, 2012 at 04:05 PM Wise-Guy Says:

Reply to #6  
The_Truth Says:

This is the same as most "multi-level marketing" schemes - there is very fine line between them and pyramid selling - which in my opinion are all one and the same - a fraud.

Thank heaven that the laws aren't made by uninformed laymen, such as yourself. (Or me.)

The number 1 difference between a pyramid and Multi-level-marketing is that a legitimate MLM moves valid products and services at credible prices.

To ensure that, there must be product movement to customers. Not just bogus intangibles at arbitrary costs.
(And certainly not just "Membership payments" in order to advance one's position.)

Herbal-life, Amway, Fuller-brush, all meet the criteria if done properly.
Stocks and futures also have plenty of fraudsters, but are perfectly legal (and sometimes profitable) when done legitimately.

11

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