Shares of Herbalife (HLF) surged more than 25 percent on Tuesday, its best performance in more than a decade, even as billionaire Bill Ackman released a voluminous amount of data in a presentation aimed at backing up his claims that the multilevel marketer of nutritional supplements is a pyramid scheme analogous to Enron or Bernard Madoff.
Herbalife, which is headquartered in Bermuda but run from California, closed on Tuesday at $67.83, recouping the losses it incurred Monday when Ackman announced plans to release his latest missive on Herbalife, in which he has taken a $1 billion short position. Investors who take short positions profit when the stock's price falls.
Ackman's central complaint about Herbalife hinges on its nutritional clubs, which he argues are targeted at recruiting poorly educated Latinos, most of whom lose money trying to peddle the company's products. Herbalife has vehemently denied Ackman's claims and recently accused the hedge fund tycoon of waging a campaign of "attacks and misinformation." Ackman, though, remains undaunted and even got emotional when he declared Herbalife CEO Michael Johnson a "predator."
"This is a criminal enterprise," Ackman said, adding that in his view Johnson "elevated the fraud. It's time to shut the company down."
Ackman had called the Tuesday event "the most important presentation I have made in my career," but he apparently didn't deliver on the promise, making a circumstantial case against Herbalife, as Herb Greenberg noted on CNBC.
Carl Icahn, another billionaire investor, has denounced Ackman's anti-Herbalife strategy. Icahn, who owns shares of Herbalife and has representatives on the board, got into a screaming match with Ackman on CNBC a few months ago. Icahn couldn't be reached for comment.
Ackman has gone to extraordinary lengths to battle Herbalife. Not only has he hired lobbyists to press his case with regulators but he also sent a team of undercover operatives to check out Herbalife meetings both in the U.S. and Latin America. The investigation costs $50 million, which the head of Pershing Square Capital described as "a number I am not proud of."
His efforts have born fruit. Earlier this year, Herbalife disclosed that it was under investigation by the Federal Trade Commission. Herbalife has repeatedly denied wrongdoing.
"Once again, Bill Ackman has over-promised and under-delivered on his $1 billion bet against our company," Herbalife said in a statement. "After spending $50 million, two years and tens of thousands of man-hours, Bill Ackman further demonstrated today that the facts are on our side."
According to Ackman, Herbalife distributors pressure their friends and families to buy products so they can get ahead in the nutritional club system, which also rewards them when they recruit people who start their own clubs.
The problem, according to Ackman, is that Herbalife doesn't clearly explain to its nutritional club members the costs they'll incur and the high rate of failure for those who try to become Herbalife distributors.
Furthermore, former newspaper reporter Christine Richard, who got Ackman interested in shorting Herbalife, pointed out that much of the sales at the clubs weren't "real" because they go to friends and families of distributors and people in training for those positions.
A company statement cited by Bloomberg News claims Ackman's allegations about the nutrition clubs were "false and fabricated."
"This has been 18 months of always the bark is worse than the bite," Herbalife Chief Financial Officer John Desimone told CNBC before Ackman's presentation. "Everything's a gotcha until it's not a gotcha."
Ackman, however, insists that Tuesday's huge gains in Herbalife's stock price weren't a repudiation of his position. He has said Herbalife's shares will fall to $0. According to Herbalife, Ackman is "running out of time" with the equivalent of 25.7 million shares in put options that expire on January 17, 2015.