Dear Mr. DeSimone,
You and I have never met. You live somewhere in California. QTR lives on the other side of the country.
One thing we share in common is that we are both citizens of the USA. One thing that differentiates us is that your personal freedom is at risk with this whole Herbalife saga, and mine is not. If proven wrong, I’ll lose some money and my reputation will likely take a hit – and it won’t be due to lack of research or lack of precedent – it’ll be because of politics. But you – your personal freedom is at stake.
Why is your personal freedom at stake? Well, between me and you and in case you didn’t know, it is alleged that you are heading up the financial segment of arguably the largest pyramid scheme in the history of modern business. Currently, you are being investigated by the US government, including the FTC, the SEC, a handful of attorney generals, and the DOJ.
On Friday, I was watching HLF trade, and noticed a small spike in the trading during the afternoon. After a while, it became clear that you had made some commentary to Bloomberg, and later in the day I read this article published on Bloomberg. In the article, you were quoted stating the following:
“We expect to be exonerated.”
Right. And I expect to marry Seema Mody.
My immediate reaction to this article was “Is Mr DeSimone crazy? Does he not know that this kind of public statement must only serve to antagonize the investigators?” I mean, think about it – if you were the FTC and you had not publicly tipped your hand one way or another to the company, wouldn’t it really “get your goat” to see executives coming out and proclaiming that all is well?
My second reaction was, “Wasn’t it just days ago that you guys said that you expect disciplinary action?” There’s a huge difference between disciplinary action and being exonerated. Remember this, from just days ago?
Herbalife has been under investigation for months about whether it’s operating as an illegal pyramid scheme, and senior executives at the company, tell Fox News it’s a near-certainty the company will avoid the death penalty, though some action – perhaps a mix of fines and sanctions – remains a distinct possibility.
Who knows – maybe the people at the FTC have been really nice to you when they ask for information or call during the day. Maybe they’re buddying up to you to get the information they want, and this is giving you a false sense of hope about the outcome of this investigation. Or, maybe you guys do have some inside insight that the rest of us do not have and you’re choosing not to make it public. No doubt, you’re a smart guy, Mr. DeSimone – but this isn’t a group of lower class Latinos you’re trying to outwit this time – it’s extremely smart, critical thinking FTC lawyers with degrees from major institutions.
So, I thought to myself, maybe I could call up Mr. DeSimone directly to try to convince you that you are gambling with your life. Instead, I decided that I would write you this letter.
The first thing I want to address is this notion that all of the critics of the company are somehow “missing” some kind of inherent truth about your business. In Mr. Johnson’s recent interview, he comes off as almost feeling sorry for us misguided “bloggers”.
He referred to people that write about your company, like me, as “knuckleheads in bathrobes”. I don’t like to bring up my educational background ever, but for the purposes of this article it’s important to note that nothing could be further from the truth. I have a Bachelors degree, a Masters degree, and another Masters Certification from an Ivy League school. I was admitted into Mensa and I’m a business professional.
My buddy Matt Stewart – who I am often compared to and who I’m sure you’ve read – has a degree in Political Science, a diploma in Honors Standing in Political Philosophy, and an MBA.
Other critics of the company include people like Kay Herbert, who posted this amazing piece about the mathematical fallacy behind your company. Kay has a Bachelor’s degree in Engineering Science and Mechanics, and a PhD in Mechanical Engineering with a minor in Applied Mathematics from MIT. He holds at least nine patents. My other Canadian friend and outspoken critic of the company, Matt Handley, has a Bachelors in Communications and a graduate level education from the New York Institute of Finance and Florida Coastal School of Law.
Then you have guys like Bill Keep, Dean of the School of Business at TCNJ – he has another pesky PhD and has been an expert witness for the SEC . Robert L. Fitzpatrick, founder of Pyramid Scheme Alert, has a B.A. in Sociology with graduate studies in Sociology. Christine Richard, who published this extremely damning article on the accounting practices you choose to “OK” for your Venezuelan business, has a Bachelors Degree in Psychology from Boston University and an MBA from Georgetown University.
And lest we forget, Mr. Ackman himself – and his magna cum laude Bachelor of Arts from Harvard (never heard of it, must be some type of community college) and his MBA from Harvard Business School.
I might not be the best looking guy in the world, QTR will admit that – but we’re not quite the group of usual “knuckleheads in bathrobes,” that Mr. Johnson is trying to make us out to be. If you’d like to let Mr. Johnson know, we’d collectively appreciate it.
Personally, I have spent hundreds of hours studying your company, Pershing Square’s research, the case law on pyramid schemes, and tons of other supplemental information regarding your company. This is the second biggest investment campaign I’ve made in my time as a private investor – the first biggest was a company I was long that I wound up relocating and working for. To say I take my DD seriously would be a massive understatement.
Having said all of that – my conclusion is as follows: you sit on the management team of a massively fraudulent criminal enterprise.
I’ve done my DD, I’ve made my decision, and I have rolled a put position in your company over and over again for the better part of the last two years. And I intend to see my position and my commentary through to the very end of this saga.
Today, I would like to teach you about dramatic irony and risk management.
Dramatic irony is a device used by authors like Shakespeare to engage audiences in great literary works. The idea is simple – audience members are privy to information that some characters in the play do not see themselves. In the tragedy of Othello, the audience knows that the evil Iago is a traitor to his friend Othello. Othello, of course, remains unaware of Iago’s duplicity. As a result, the Tragic Hero’s demise is foreseen by the audience. The audience is powerless to stop the outcome. The viewing experience is extremely emotional – it can create Pathos – a deep sadness for the audience who knows the eventual outcome of a situation.
Contrast this to a Pantomime. In a pantomime, there is always a hero and a villain. Whenever the villain walks on stage the audience, (typically made up of children) jeers and shouts loudly in order to warn the hero on stage that the villain has ulterior motives. Pantomimes, unlike Shakespearian tragedies, tend to have happy endings.
Mr. DeSimone – it’s my belief that you are not an actor in a pantomime. Rather, I believe you are a leading character in an unfolding tragedy.
The second topic I would like to write to you about today is risk management. Specifically, I would like to ask you the following question: what if you are wrong? Has it ever occurred to you that you, the executive team, and Mr. Johnson are all completely, 110% wrong about the way you view your company?
Let’s use some of the players in the Herbalife saga to illustrate my point.
Mr. Icahn owns 17 million shares of Herbalife. If his investment thesis is wrong, he may lose about $850 million ($50 x 17 million shares). Even as this is an extraordinary amount of money, Mr. Icahn will live to fight another day. He similarly beefed his investment in Blockbuster – it happens – all good investors take their knocks, Mr. Ackman included.
The “Baron of Bran Flakes,” Mr. Bill Stiritz owns over 7 million shares of your stock. If his investment thesis is wrong he may lose $350 million (7 million shares x $50). This could be a significant percentage of his personal net worth. Still, even if Mr. Stiritz is wrong, he will live to fight another day.
Mr. Ackman is short perhaps 20 million shares of your common stock in some way shape or form. If he is wrong, and your stock rises to $80 or $100, he might lose $600 million or more. This is less than 10% of his investor’s capital. He would no doubt be bloodied, but would survive.
In contrast, if you and the entire Herbalife executive suite are all wrong – in all likelihood, you could go to jail.
So then you have to ask yourself, “Self, what is the best way to manage this risk, so that I don’t wind up in jail”
One option is to play stupid and keep doing what you’ve been doing, giving others the impression that you don’t know the magnitude of what it is you’ve been accused of. This seems to be the pathway you have chosen. In practice, not only do you remain Herbalife’s CFO, but you seem to have become its chief spokesperson recently. Mr. Johnson is obviously a liability with the media because he he’s got a temper, as we all saw when he flipped out on CNBC after Mr. Ackman’s original thesis. In contrast, you and Mr. Walsh are pretty good at PR – you don’t take the bait from reporters, you get stay on message pretty effectively, and you tend to keep control of your emotions.
This is impressive until and unless one considers that those messages can come off as a bit sociopathic. Arguing that your company doesn’t victimize the poor is both cynical and anti-social.
As a member of the audience, so to speak, this seems obvious to me. My guess is that the government probably doesn’t like your company very much. The plot, in all likelihood and in QTR’s opinion, will unfold in a manner where Herbalife is shut down in its entirety.
So, if I wind up being correct, how can we handicap your personal fate?
As you contemplate this question, I wonder to myself about the people you care about that, in turn, care about you. Where are your priorities, Mr. DeSimone? Do they really lie with Mr. Johnson and guys like John Tartol? I don’t want to get personal, so I’ll leave it at that.
Of course, this is why certain members of your Board of Directors resigned last year, why Shawn Dahl and Anthony Powell are no longer with you, and why (in all likelihood) many individuals in the world of Herbalife are petrified of the outcome of the government’s investigation.
Mr. Ackman has both the name power and the research/monetary resources to expose your fraud. Still, you go on TV and talk to reporters to tell the world what great citizens you are.
“The fault, dear Brutus, is not in our stars, but in ourselves…”
– Julius Caesar
Today, I’m writing to you to try and help you. Take your head out of the sand for a second and awaken to what could be your personal truth: if you are the CFO of the biggest pyramid scheme in the history of modern business, you could be in a real heap of trouble. Matt Stewart’s article located here really shines some light on how big of a role the financials have played in this company’s “success”.
What would I do in your situation? I’d probably turn myself into the regualtors and try and cut my losses – I might even pick up my phone and call Pershing Square – I am sure they could probably offer you some direction. Or, call your local FBI office and turn yourself in – this is the only way to protect those who care about you.
Do you honestly think Michael Johnson, John Tartol or Leslie Stanford aren’t going to look out for themselves when the shizen hits the fan? Do you honestly think that the SEC isn’t going to want to go after the CFO of the biggest pyramid scheme in modern business history?
Between me, you, and the couple thousand people that will read this, I’m starting to think that you are materially detached from the same reality as the rest of us. Telling the media that you “expect to be exonerated” is not only ridiculous at this point, but it is obviously not a great PR move. This kind of statement continues to mock the FTC directly and makes you look cold and calculated.
Not to mention, full of it.
A while ago, I wrote an article called “Don’t Get Your Hand Caught in the Herbalife Cookie Jar“. When you get caught with your hand in the cookie jar, the correct way to behave is not to fight tooth and nail when the evidence is against you. On the contrary, the correct play is to cut your losses and to take your knocks.
I remain convinced that you are the CFO of a publicly traded confidence game – as the one who manages the numbers, you’re directly liable for the cloak of obfuscation which this company operates in order to confuse and bilk victims that think they’re going to make millions selling Formula 1. As CFO, you’re also directly attributable to the company’s whack Venezuelan accounting, as well as whatever is going on with your China accounting.I think your days are numbered and other really, really, really smart people share this view.
Under the circumstances, what’s your move? Keep going on TV and telling people everything’s going to be OK?
If I were you, I’d get a damn good lawyer before Michael Johnson beats you to the punch and the people you once thought were your friends turn out to be feeding you to the wolves.
It is so obvious to anyone who has seen the pure sadness and evil of Universidad Del Exito, Club 100 or the churn rates in your business that this company is appalling in how it turns a profit. Certainly, the right thing to do – for humanity – is to stop Herbalife before it can do any more damage.
Hopefully, with some serious soul searching, you will reach the same conclusion – the clock is ticking.
If it all does come crashing down, you – like those on the BOD who received similar letters from Pershing Square – can’t say you weren’t warned.
Godspeed, Mr. DeSimone.