Icahn v Ackman and Herbalife

Everyone else is opining on this so I will also…..

Herbalife is a pyramid scheme. Period. Why?

For me it is pretty simple. They do not sell their products through retail channels. They sell them through distributors who are recruited by other distributors. Step one in the “increase sales” process is to recruit more distributors. Without adding distributors, sales are stagnant as the company has presented no evidence existing distributors are able to increase sales without also increasing recruiting.

“[T]he organization is deemed a pyramid scheme if the participants obtain their monetary benefits primarily from recruitment rather than the sale of goods and services to consumers”

Without continual recruiting, the organization falls stagnant and enters into decline due to the natural attrition of existing distributors who like 99.9% of them, make no money and in fact are poorer than when they started. Note, again, there is no evidence existing distributors are able to increase sales without additional recruiting. Because that is true, the company derives it monetary benefits primarily from recruiting, not sales. Without recruiting, sales go into decline which means recruiting drives sales.

A pyramid scheme

Ackman v Icahn

This has nothing to do with $HLF. This about a decade old grudge Icahn has decided to try and settle. Now, we always read everywhere not to let emotion guide our decisions and that is precisely what Carl is doing here. While we will tell everyone we think investing on pure emotion is stupid and eventually doomed, we sure as hell like watching other people do it. It makes for great drama.

The media and blogs will run with this declaring a winner based on the daily price change of the stock and while that will garner page views, it is a fundamentally flawed way of looking at the situation. The two parties have different objectives here.

Icahn is in this to make a quick buck and do a victory dance which is why he bought a load options, not stock. The options also limit his down side should he be wrong to a fraction of what it would have been had he bought all stock. Because he is Carl Icahn, he will get a bump in the stock and make money on the trade. Then he can go on TV and thump his chest bragging about getting the better of that Ackman guy” this time. Does that mean he wins? No. Why? Ackman is in this until the bitter end. For those thinking he might be tempted to call it a day and move on, read “Confidence Game” about his 7 yr, battle with $MBI. What the price does now is wholly irrelevant to him. When he says he welcomes Icahn getting into it he means it. The thing he wants more right now is publicity on this and Icahn is giving it to him. The more publicity, the more likely someone agency or AG decides to see what is going on.

At the Harbor Investment Conference Wed Ackman did an hour Q&A. As one would expect, a large percentage of the time was spent on $HLF. During the discussion Ackman revealed that both Pershing and his law firm have been contacted by “numerous regulators and other authorities (read: AG’s)” over the past few weeks. He also, without saying gave the impression (at least that was my take) there are currently ongoing discussions with those entities. He was also quick to point out “it only takes one”. One State AG to file a suit and start doing depositions under oath and the whole thing comes tumbling down. That’s it. There are currently 31 1st term AG’s in office in the US, would be a nice feather in the cap and some pretty sweet publicity to take down the largest corporate ponzi scheme when you are running for re-election. All he needs in one agency/AG to start digging and the others will pile so fast keeping the roster straight will be difficult. Ackman has been begging….begging $HLF to sue him since he went public and despite $HLF calling his claims “slanderous and libel”, they have not done a thing.

Silence can speak far louder than any spoken word.

Now, many folks who doubt the thesis say “the SEC won’t want to admit they missed this so will ignore it”. This line of thinking ignores the new head of the SEC, former Prosecutor Mary Jo White. Is there any better way for a former prosecutor to make a splash at her new job and signal a new direction and new toughness at the SEC that to take down $HLF less than a month after her being in office? Does anyone think that White being sworn in on Jan 25th and Ackman’s statement that regulators have reached out to them “recently” is just some odd coincidence of timing? I mean White prosecuted John Gotti, $HLF is a spa day of harp music, massages and tea compared to that.

Other will say, “Ackman laid it out, if regulators were going to act they would have done so by now” … Well, I am more than a little sure that 18 months of work and a 342 page presentation are being looked at rather closely for errors and that does take some time. Since this is such a public debate, people are going to cross T’s and dot I’s before jumping in. That takes time.

Still others will use the ludicrous argument that it is a 30yr old company, so it has to be legal…….. um Madoff? The very essence of a ponzi scheme it is runs undetected (often for decades) until new recruits dry up or the schemer slips up, then it collapses. We should note that the recent high profile ponzi schemes (Stanford, Madoff etc) were NOT discovered by authorities but rather collapsed when they ran their course. Time in existence and legality are not synonymous nor should it be an investment thesis.

Lastly, there are those saying that Ackman is just trying himself to manipulate the stock down himself for a quick profit. This argument fails the “common sense” test. Ackman has declared this to be an illegal activity and a ZERO. Further he has publicly called out authorities to look into it and shut it down. For him to cut and run before the conclusion of this would ruin his reputation forever and make any future proclamations from him on anything else immaterial. An activist investor exists on their reputation. There is no chance he ruins his now for a quick buck and at the same time tarnishes the rest of a very long career. Additionally, making the statements he had made and then covering his short for some quick money would in fact open himself up to legal actions from $HLF and probably the SEC on attempts of price manipulation. This “manipulation” line of argument borders on stupid

So, if we have to pick “winners” here we should say that Icahn will “win” in the short run, but only if he cashes in his chips in time. Ackman will be right on this in the end….




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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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