Someone asked me earlier today if I should just consider this investment a success and move on. I’m somewhere near break even or possibly even in the black after paying for two years worth of (ridiculously expensive) put premiums and costs to borrow common, and Ackman is finally past break even. Why not quit now, use my brain power on something else, and say “screw it” to the outcome of this case? After all, it’s been lengthy, it’s been costly, and it’s been dramatic.
I told the tale this week of my local Korean grocer. In it, there’s a line where people line up to buy cold cut sandwiches and other condiments for quick and easy meals while out and about in the city. The line can often get long and the staff has one speed: barely adequate. As such, often a line will make its way past the deli counter and back to the bowels of the store. From most parts in the line, a small sign hanging above the cash register is visible.
It reads: “You never need patience more than when you’re about to lose it.”
And, as I told a few people this week, that has become my de facto motto for this trade. Everything I needed to learn about patience I’ve learned from Bill Ackman and my Korean grocer. Maybe I should throw that onto my resume.
So, when I look to consider outcomes for this Herbalife investment, I make the case pretty quickly to myself about why I should stay short. I say to myself:
1. “Self, the company is a fraud and the right thing to do for the human race, not to mention the economy, is to shut it down.”
2. “Self, the company is crumbling from the inside out, the downside thesis for going short has never looked better and the risk of LBO or this company running back to $83 is minimal.”
3. “Self, I can get a bit fascinated and obsessive. This is my one mulligan to my “no emotion” investing/trading rule. Everybody gets a mulligan.”
4. “Self, I’ve spent 2.5 years doing non-stop research and not unlike how failing distributors feel, I’m pot committed.”
5. “Self, the firsthand primary sourced evidence has never been clearer, and we believe the government can discern the facts from the obfuscation (albeit slowly).”
Since Mr. Ackman first laid out his original thesis on the Herbalife fraud, there’s been a few people who have carried the torch for his cause onward with the same stoic demeanor, from December 2012 until now. In that time, bears have endured a couple of the best reporting quarters in the company’s history, a flurry of bullish sounding LBO rumors, all time highs for the stock price, and some of the biggest names on Wall Street lining up on the other side of the trade. Withstanding that type of opposition isn’t an easy thing, and people like Seeking Alpha’s Matt Stewart (bear since 1/2013), Herb Greenberg (produced a documentary in early 2013), Bob Fitzpatrick, myself (bear since 1/2013) and Bill Keep have been the minority in Bill Ackman’s corner. Since then, we’ve been joined by many others who now blog and write critically about the company. I believe the pendulum is starting to swing in the direction of common sense (and the bears), and the public is starting to “get wise” to Bill Ackman’s analysis of Herbalife. Mr. Ackman, not a stranger to long-term shorts (MBIA took seven years), continued his systematic dismantling of Herbalife this week, releasing an internal video where an Herbalife distributor admits the company is “an eventual deception.”
Nine million people have been harmed by Herbalife and its false promises. More are being harmed every day. Here’s a Tweet I shared with the FTC a few weeks ago:
This will make for an interesting study in human psychology, for sure. There’s probably still going to be a select group of people that, when Herbalife is pile driven by regulatory agencies, will ignore the massive fraud under the surface and claim it was all Bill Ackman’s fault. That’s just the lunacy of the financial markets and the public’s fundamental misunderstanding of them for you. “Market manipulation,” they’ll scream. “Buying the system!” and “Paying off regulators,” will likely be the misguided cries by those who defended people with the moral fiber of John Tartol and Michael O. Johnson, part and parcel with the biggest fraud since Madoff, Enron or that chick from Match.com who once claimed she really liked me.
The sooner the longs figure out that this trade isn’t about Bill Ackman, it’s about fraud, the more of a chance they have of getting out before all hell breaks loose. There’s a reason guys like David Einhorn take their knocks in short positions, like he has with Questcor/Mallincrkodt. That reason is: evidence. And, the evidence points to Herbalife being a worldwide confidence game.
In all seriousness, my conviction levels for this trade are at all time highs. As Mr. Ackman put it on Bloomberg last week, there really isn’t much of a bull case for owning the stock any longer. I wrote about this two quarters ago in my critically acclaimed, “Herbalife: POOF! There Goes the Bull Case.” The four biggest instutional investors are stuck in a long squeeze and the rest of the world has “seen the light,” driving Herbalife’s share price down from highs of $83 to lows in the $35’s. The really amazing thing is that this still represents a $4.89 billion enterprise value on the company, which is roughly ten times the company’s estimated free cash flow for next year.
Perhaps Ackman should have just let the fraud perpetuate until a demise of its own making. Only in the world of finance would one of the world’s most successful hedge fund managers, making a 100% legal investment, committing 100% of his profits to charity, pointing out disgustingly blatant evidence of fraud, and claiming regulators should get involved, be viewed as the enemy.
Guy Adami Tweeted last week:
My buddy Matt Stewart so eloquently responded,
In the interim, the company continues to egregiously and perversely violate all kinds of rules: FDA rules, SEC rules, FTC rules, securities laws, the 1986 permanent injunction, common law precedents governing pyramid schemes, and just about every PR rule you can violate. As Walter Sobchak would say:
So, without further ado (As Robert Klein would say, “what is ‘ado,’ and why can’t we have any more of it?”), here’s 15 insane (but true) reasons this fraud should have been shut down already.
1. We Now Have an Insider, on Video, Admitting the Company is a Pyramid Scheme
Been under a rock for the last couple of weeks? Pershing Square released, in the last two weeks, two different videos. One video shows fraudulent health claims made by company distributors, breaking nearly every rule in the book. The second video, released last week, shows internal video footage from a top Herbalife distributor, who admits that the company is “inauthentic” and “an eventual deception.” Here’s some quotes from the white paper that accompanied the video:
This one piece of evidence alone should be enough to do it. Instead, its a part of hundreds of bricks in the wall that make up the case against Herbalife.
2. BurnLounge Sets the Precedent: Herbalife Should be Shut Down
Very few people have gone back and read a lot of the pyramid scheme case law. Matt Stewart is one of those people. While reading the BurnLounge decision, which you can read here (h/t FT), you’ll see it upheld the Omnitrition case. Stewart makes a simple yet potent observation in a Tweet that he posted this past weekend.
If you don’t think Herbalife is a company built on selling the dream, and not the product, take a look at this video – or, all you have to do is scroll up and look at top distributor Stephan Gratziani’s words: “The Herbalife business model is based on distributors purchasing volume from them. . . . The Herbalife business model, at this point in time, is not based on customers purchasing, it‘s based on distributors purchasing volume.” (Video 2, 14:34.).
Done and done.
3. The Company Doesn’t Seem to Care for Securities Law
A baffling occurrence came when Herbalife was initially defending itself and trying to prove it was making “retail sales.” I’ve talked about this ad nauseam during previous articles on Herbalife. Long story short, Des Walsh gave this answer to the retail sales question on a conference call:
Then, Herbalife changed Des’s answer to “We don’t track this number and do not believe it is relevant to the business or investors.”
Then, CEO Michael Johnson, sounding like he had just finished the Iditarod, furiously answered questions on CNBC in regards to this issue, sounding half annoyed and half like he just got done playing a game of full court basketball.
Then, he comes out to say that 90% of distributors are buying their own product.
Guys, why not take a copy of Reg FD and just light it on fire on national television? Not only are these examples all over the board, but some of the admissions from Johnson are clear evidence that can be used against them. Is it any wonder Mr. Johnson isn’t doing too many on-air interviews anymore?
Let us also not forget the “exoneration” talk that hit the airwaves just days before one of Herbalife’s worst earnings displays in years. Here’s the two seperate messages the comapny was giving about the FTC investigation. One is before the investigation and before the horrible earnings display, the sad-sack version is the one that came out “after the damage was done.” I investigate both of these in a Tweet:
I’ll make my argument here by posing a number of questions:
- Do you think it is a coincidence that Herbalife’s poor earnings were pushed out onto a date well past when they usually reported Q3?
- Do you think it is a coincidence that the week prior to Herbalife’s poor earnings, Michael Johnson did a 20 minute interview with LA Mag?
- Do you think it is a coincidence that the week prior to Herbalife’s poor earnings, certain news outlets were reporting the company would be exonerated, causing a seismic intraday shift in the company’s stock more than once, on days this occurred?
For more information on how Michael O. Johnson potentially violated Regulation FD, you can read this additional report from Shortzilla.
4. Continued Breach of the 1986 California Permanent Injunction
Having trouble getting in touch with Kamala Harris? QTR had major trouble. As a matter of fact, it was trying to find different ways to contact Kamala Harris that led QTR to the fact that she was married to a partner at a Herbalife-retained law firm. Since then, I’ve found Mr. David Beltran (Twitter account linked here), who is Harris’ communications executive. He’s been the only voice to comment on Herbalife out of her office, and his comment has been: we have no comment.
For the longest time, many Herbalife skeptics have wondered what is preventing California Attorney General Kamala Harris from enforcing a permanent injunction against the company that, among other things, calls for the company to maintain records of its sales to distributors, stop making health claims, and stop pumping absurd income related claims that have driven the company’s success over the last decade or so. Click here to see a video where Herbalife’s CEO tells you that being a distributor is a “solution for these tough economic times.”
Pretty bold claims for a company that says people only sign up for a little part time income, no?
An article was published weeks ago by Matt Handley that is a must read. The article details the 1986 permanent injunction against Herbalife. I have also detailed the injunction on my Twitter in the past. A full text of the injunction can be found here.
5. Bill Keep, Recognized by the SEC in the Past as a Pyramid Scheme Expert Witness, is Scathingly Critical of Herbalife
We don’t have a lot of pyramid scheme experts in the U.S., but the two closest things we have are Dr. Peter Vander Nat and Dr. Bill Keep. And guess what? Keep has a major distaste for Herbalife.
Keep is, from his description, “Dean, School of Business and Professor of Marketing at The College of New Jersey and co-author with Peter Vander Nat, a senior economist at the FTC, of 2002 and 2014 journal articles on pyramid schemes and multilevel marketing.” He has “also served as an expert witness in the prosecution of pyramid schemes, including Gold Unlimited, brought by the US Department of Justice, and International Heritage Inc, at the time the largest pyramid scheme prosecuted by the SEC.”
6. The FDA Now Appears to Be Keeping an Eye on Herbalife
Herbalife has 99 problems…and all of them begin with regulatory initials. Just this week, the FDA threw their name into the “it’s not our fault if the thing gets shut down” hat, by advising Herbalife that they were full of shit (my words, not the FDA’s) when they rolled out some former FDA official to validate the company’s commodity products.
I first pointed this out after seeing this Natural Products Insider article from a Google alert. I tweeted about it on Friday, before several news outlets picked it up – none of which referred to my original Tweet as a source. In addition to the Kamala Harris husbandgate story, it seems QTR never gets his due for breaking a legit Herbalife story. More important, I concede, is that the information is getting out there. Go figure.
7. This Questionable Death in Mexico
For a while, the lead content in Herbalife’s products had been in question – recently, an article surfaced online that bore this headline:
Days after, a Mirror story was mysteriously taken off the internet – but this original text remains. After doing a little digging and trying to figure out if this could have just been a product of this woman’s previous health ailments, or perhaps the water used in her area, I came across some interesting documents from the 2000’s. There is this letter from the “Fraud Discovery Institute,” that warns explicitly about the lead content in Herbalife’s shakes. The letter says the following:
The study, which included lab analysis by an FDA-registered lab, plus medical literature, Herbalife’s product literature and various peer reviewed medical journal articles written about the numerous cases of hepatoxicity associated with the use of the same Herbalife products, was reviewed by Christopher Grell, co-founder of the Dietary Supplement Safety Committee and lawyer specializing in dietary supplement litigation. The alert can be viewed at the Fraud Discovery Institute’s website (‘http://www.frauddiscovery.net’). According to Grell, the six Herbalife products tested showed levels of lead that are both dangerous and that are in excess of what the law allows under California’s Safe Drinking and Toxic Environment Act of 1994, more commonly known as Prop. 65. The Proposition was intended by its authors to protect California citizens and the State’s drinking water sources from chemicals known to cause cancer, birth defects or other reproductive harm, and to inform citizens about exposures to such chemicals.
Subsequently, a press release was put out in 2008 which stated the following, according to a “10 year, 40 page study” conducted by Attorney Christopher Grell:
In newly released lab results from one of the nation’s largest labs with a presence in over 30 countries, both Usana and Herbalife have lead levels that are over 1000% more lead than allowed under California law when taken as directed daily. The new results also revealed that the average lead content for non multi level marketing health drinks averaged 0.607 micrograms per day while Usana and Herbalife combined for a whopping 9.760 micrograms of lead per day. “I do not care what your liberal interpretation of Proposition 65 might be,” said attorney Christopher Grell, “but these percentages are astounding and will hopefully catch the eye of California regulators.”
Well, Chris, they didn’t. Kamala Harris – where are you?
8. Every Day that Herbalife Continues, More are Harmed and Less is Available for Restitution
This is an easy one.
One has to hope that there’s going to be some restitution for people like these, who have been blindsided and shellacked by trying to “earn money at home.” Herbalife has already raped and pillaged its own balance sheet, so the little in assets that the company has left should be swiftly locked up by the authorities in order to secure some restitution for those harmed by the company and its practices.
9. They Have a Board Member, Pedro Cardoso, Who is Wanted for Fraud in Brazil
Imagine, if you will, what would happen at GE or Amazon.com if a board member was accused of fraud in another country? Perhaps you’d expect an instant resignation or an internal investigation, at the least. In Herbalife’s case, how about a nice big bowl of nothing? In case you missed it last month, it was revealed by Reuters that Herbalife director Pedro Cardoso has been wanted for a $10M embezzlement fraud in Brazil since 2008.
Here’s what I wrote:
Cardoso, who apparently lives in Brazil, has said in a statement to CNBC that he had no idea he was being sought in connection to the case.
This Portugese story (worth translating using Google) profiles the Brazilian mob boss who Cardoso is tied to. He appears to be one of the most powerful men in all of Brazil, which leads me to ask why Cardoso is included in 12 people that are sought in this case? While I have no doubt Cardoso and Herbalife will try and distance themselves from this, I’m positive there’s still stones that need to be turned over here.
According to Scott Wapner at CNBC, the company is denying that they knew anything about this. Herbalife also told Scott Wapner that they just found out about the news two days ago, which begs the question: why did Reuters have to break the news? Did the company have any plans on disclosing this?
One of these three scenarios has to be true:
a. Cardoso had no idea (unlikely). If true, it’s official – now he knows. Resign from the board and turn yourself in.
b. Cardoso knew and didn’t tell Herbalife (likely). If true – now Herbalife knows. It looks like Leroy Barnes announced his retirement at the perfect time. Other board members and executives would feel betrayed if this is the case. I suggest they all think long and hard about distancing themselves from Herbalife before the next shoe drops, whatever it is.
c. Cardoso and Herbalife both knew (unlikely). If true – and shareholders weren’t made aware of this litigation while voting on Cardoso, it’s securities fraud.
Nothing would surprise me at this point.
It also happens to be an interesting coincidence that Jose Gratz, the EXTREMELY powerful man that Cardoso is tied to, has ties not only to murdering judges and witnesses – but to money laundering. Could Herbalife be the perfect vehicle for money laundering in and out of Brazil?
Ask yourself what kind of a company doesn’t make a comment about this. Is it possible Cardoso has the goods on the execs and he’s bargaining for his seat? Could the distributors have more leverage than we know about – perhaps, maybe, from something like…
10. The Tirelli Agreement
My buddy Matt Stewart initially put me onto the Tirelli Agreement, which was easy to find at this Facebook page (save the source, will probably be taken down soon), where distributors often leave the “droppings” of their fraudulent claims out for all the public to feast on. It’s how I found all the bullshit claims made by distributors that I used for my story, “The Outrageous Claims the Fuel Herbalife.” Same thing goes for stuff like this on YouTube.
Anyway – this is what a piece of the Tirelli Agreement looks like:
As I pointed out on Twitter, the Tirelli Agreement appears to be a binding legal document between Herbalife management and its top distributors. The purpose? To keep the compensation plan the same. Top distributors like it, because it keeps their gravy train going. Management likes it because it keeps its top distributors happy – and happy distributors keep recruiting.
11. The PR Team is Just Making Things Worse
I’ve long been critical of Herbalife’s PR campaign, as they seem to be running the international “show you we’re guilty” playbook from their PR department. In between ad hominem attacks of the company’s critics, the company has been mixing messages with itself and generally is found doing the wrong thing.
- This link shows where I’ve dismantled the company’s Twitter account.
- I also reality checked one of the many websites they’ve created to combat the wave of negative PR.
- Here’s where the company bludgeoned the wires with 5 unnecessary press releases, all at the same time.
- Here’s some bullshit about sun tan lotion.
Then, you have the most recent blunder where a Business Insider reporter basically told the company’s PR team to “step off,” after they incorrectly quoted her in an “ad” that was critical of Bill Ackman’s latest evidence:
In spite of all of this, newly hired Alan Hoffman has been the latest cheerleader for the company via social media. Remember, Alan, things on social media can’t be “unsaid.”
12. Longs are Starting to Get the Picture (A.K.A. Bob Chapman is My New Buddy)
Remember Robert Chapman? He’s the guy that looked like everyone who has ever beaten the shit out of me at a bar. He was also the guy that went on CNBC and, on two occasions, claimed Herbalife was worth $150 and $300.
As Herbalife closes in the high $30 region, Mr. Chapman’s predictions are looking more and more optimistic. But that’s okay, because today I extend an olive branch to Mr. Chapman. Word on the street is that he’s come around.
As a matter of fact, check out this Bloomberg piece, inclusive of Mr. Chapman’s mea culpa.
In addition to Mr. Chapman, the recent round of filings showed that many other longs, including George Soros, were bailing on the good ship Herbalife. It looks like Wall Street is finally getting the picture. Congrats, Mr. Chapman.
I’m still, however, waiting on my Christmas card from John Hempton.
13. It’s Going to Fail Regardless: Distributor Confidence Demolished
3.9 million distributors just watched Stephan Gratziani tell them that the system they signed up for is a “deception.”
That’s going to have an obvious effect on the way the company recruits. Who is going to want to be an Herbalife distributor now?
Anyway – as Mr. Ackman said in his Bloomberg Interview last week (full 26 min. version here), the company has “put itself on sale,” meaning it’s unlikely they’re coming up with the requisite number of distributors to keep their numbers quarterly filings looking good.
14. It’s Going to Fail Regardless: Currencies Will Cripple Them
It’s been no secret that emerging market currencies are getting slaughtered. Venezuela was the catalyst behind last quarter’s massive miss, and the Bolivar continues to lose value. In addition, the Ruble is also getting smoked:
Because Herbalife has the unique position of producing items in the U.S. and recognizing the revenue overseas, they have tons of exposure to the world’s currency issues.
15. They’re Just Plain Liars
I could come up with tons of examples – let’s just look at this one.
How else do you justify the statement made in 2012: “We have a solution for these tough economic times,” when compared to what Herbalife writes on their website in 2014: “Most members join simply to receive a discount on products they consume, some join to make part-time income as well, and a small percentage join in search of full time income.”
Conclusion: 24 More Reasons
In case you haven’t read it, “24 Reasons that Herbalife is Mocking the Regulators” is my magnum opus of sorts, penned in an emotional 12 hour period the day after Ackman’s fraud-evidence-laden presentation this summer was laughed at by irresponsible media and generally out of the loop public. It’s worth a look if you’re looking for more reasons that the company should be shut down – try not to read it immediately after eating.
Herbalife is an intrinsically fraudulent company that just missed two lowered guidance points the last two quarters, has lied about health claims and income claims to potential distributors, with a Board Member currently being sought for fraud, with questionable ties to a lead poisoning death in Mexico, whose audit chair just resigned, built on a top of a pile of mathematical impossibilities, that’s seemingly in violation of numerous FTC consumer protection laws, Federal Securities laws, possible RICO laws, the 1986 permanent injunction against the company – headquartered in the U.S., based out of the Cayman Islands, and expanding into places like Burundi and Greenland.
This farce has gone on long enough: it’s time for regulators to shut this company down.
DISCLOSURE: Short Herbalife common and long puts