Is Herbalife Violating Securities Laws by Ignoring Reg FD?

3/23/15

You can read the SEC’s Regulation Fair Disclosure (FD) here. It’s a long boring read that I basically had to memorize some years back. Basically, it says everyone has to be told material information all at the same time.

For those of you that haven’t worked in public communications or at a public company, here’s how the SEC sums it up (my emphasis in bold):

Regulation FD addresses the selective disclosure of information by publicly traded companies and other issuers. Regulation FD provides that when an issuer discloses material nonpublic information to certain individuals or entities—generally, securities market professionals, such as stock analysts, or holders of the issuer’s securities who may well trade on the basis of the information—the issuer must make public disclosure of that information. In this way, Regulation FD aims to promote the full and fair disclosure.

It basically says that once you disclose something material, you have to tell the whole world about it within a certain timeframe. Ideally, you release it to everyone at once. This is why companies often post presentation slides at 8AM the morning of an investor day. Reg FD was likely written up to give the public the same chance as big investors to act on material news.

From what I’ve gathered today, it seems like Herbalife is having a little investor day of their own, but failing to include the public on what, exactly, they’re disclosing. Judging by the movement in the stock price, it appears it may be just a little more than pleasantries over the fresh catch of the day.

Question: If the company’s official stance on the FTC investigation all of a sudden went from, “we can’t predict the outcome of the FTC investigation” to “we’re confident we’re going to be exonerated,” would that be a material event?

QTR sure thinks so.

**

Last week, two pieces of news broke that the market got wrong. I could go into detail about why both pieces of news were read wrong by the market, but you can just read that in a recent comment I’ve made. 

Regardless, the squeeze was on and Herbalife jumped a couple percent. On Thursday, the hysteria from the “Awad lawsuit” and “grand jury” headlines seemed to have calmed down. On Friday, again, the stock ripped higher. First thing today (Monday), the stock did the same, ripping much higher before giving back some of its gains. It closed around $45, roughly 35% higher than it was trading just days prior.

What could have caused this?

Continued short squeeze from days prior?

Maybe, but unlikely. It sure seemed like a fresh infusion of buying.

Today, Monday, Herbalife traded over 11 million shares. It’s daily average is around 1.4 million.

**

So let’s take a look at what CNBC reported about Herbalife’s move upward today:

Herbalife’s CFO, John DiSimone [sic], is currently traveling the country speaking to investors, according to one analyst who declined to be named.

So Mr. DeSimone has gone on a road show, has he? Interesting. Haven’t seen any slides or presentations disclosed, so he’s probably just sticking to the company’s already disclosed script. No new guidance, no new earnings projections, and definitely no new information on the regulatory investigation which holds in the balance the entire future of the company, right? As a reminder, here’s the “script,” the company recently disclosed in late February in their 10-K filing with regard to the FTC investigation:
cannot

Likely DeSimone is just sticking to the same old boilerplate until the FTC resolves the case, right?

But, wait. Let’s now look at what Charlie Gasparino is reporting:

The ad buy also coincides with a series of meetings last week between Herbalife Chief Financial Officer John DeSimone with analysts and major institutional investors where he’s expressed optimism that Herbalife will survive largely unscathed from a series of regulatory investigations into the company’s business practices.

Yikes. It would certainly appear to QTR that:

1. If the 10-K is saying one thing and DeSimone is saying another – to a select group of investors who may or may not have had the advantage of buying last week – about a massively material outcome to the company, that could be in violation of Reg FD.

2. Traders didn’t have access to anything that was said that potentially moved the stock upward the past day or so. This is why most companies disclose their investor days and the corresponding news. What’s on the agenda for these meetings, Mr. DeSimone?

3. As Mr. DeSimone continues his tour, even the big “institutional” investors on the road trip this week will already be “late to the party” to the tune of 20%+. 

**

We dealt with this “questionable” disclosure last year. Remember this? The company quickly scurried to correct this message when Mr. DeSimone went on TV and corrected himself. Is he making the same mistake, again? Charlie Gasparino seems to think so:

cgas

So I ask today;

1. What has Mr. DeSimone told people this week?

2. Is it something that could move the stock up 35% on heavy volume?

3. Why is the public hearing about this changed stance just today?

4. What, if any, institutions or “big investors” were buying this week? Where do they sit in the Venn Diagram of people that “happened” to attend one of these dinners?

5. Where is the SEC?

**

One of the first things I learned about trading is “there are no coincidences”. Today, Herbalife was pushed to 2015 highs, up 8%, on no news, on 11 million shares, almost 10 times the daily normal average.

Just a short squeeze? You guys figure it out.

3 thoughts on “Is Herbalife Violating Securities Laws by Ignoring Reg FD?

  1. WillJeffers If it is to be vindicated of any pyramid scheme as ALL news has suggested recently even this article, then you’re not even right by crying fraud. The news is out on the wire, it’s just not coming from the FTC yet that’s not any violation.

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  2. Since last October he publicly said “We anticipate at the end of the day we will be exonerated,” Chief Financial Officer John Desimone said in an interview. I don’t think this is anything new, he is just giving the wink wink again, only this time it’s formal but since it was disclosed last year it’s not giving any one unfair advantage. He’s reminding the big guys of what has already been released to the public, just a reiteration.

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