“The (US) Department of Justice (DOJ) recently sought information from the company, certain of its members and others regarding allegations being made about the business practices of the company and its members,” Los Angeles-based Herbalife revealed in a 1767-page regulatory filing about its latest financial results. Herbalife (HLF) is a global nutrition company that sells nutrition, weight-management, energy, fitness and personal care products. The company declared 7,800 personnel worldwide and net sales of $5 billion in 2014. Although the Herbalife’s stock recovered from its lowest daily 52-week valuation at $29.70 to hover around $40-$47 in the last 15 days, the stock is still 33 percent below its $60 valuation year-on-year, however still up 66 percent since 2010.
In addition to Herbalife’s roller-coastering on the New York Stock Exchange (NYSE), the announcement about the DOJ thus came as an additional positive step for billionaire investment activist Bill Ackman and his firm Pershing Square Capital Management (PSCM)’s all-out offensive against what it has denounced as the “Herbalife’s Pyramid Scheme.” Since 2012, Ackman has loudly questioned Herbalife’s business model, affirming that the majority of Herbalife’s distributors lose money – fellow investor David Einhorn shorted Herbalife’s stock in 2012 while Ackman’s rival Carl Icahn bought up to 16.5 percent of Herbalife by mid-2013 soon joined by George Soros and William Stiritz. Icahn is said to have reduced his stake at around 5 percent since then.
After a 1-year investigation, Ackman said “the scheme led to more than $3.5 billion of total net losses” since 1980. Herbalife rejected Ackman’s accusation as “a malicious attack on Herbalife’s business model based largely on outdated, distorted and inaccurate information.” This didn’t prevent the Federal Trade Commission (FTC) from releasing 729 pages including 192 complaints received over a 7-year period, a move that strengthened Ackman’s posture and started the Herbalife’s stock lowering. The feud has taken such huge proportions that among Herbalife’s registered 1612 websites, according to Cyceon, at least 45 of them allegedly aim at telling the “real truth” about Ackman and his financial group like the “billackmanlies”, “therealackman” and other “ackmanpershingsquare” locked domain names.
Still combative, Herbalife stressed it will fully cooperate with any government or regulatory inquiries or investigations. However, “these matters may take several years to resolve. While the company believes it has meritorious defenses, it cannot be sure of their ultimate resolution,” Herbalife wrote about the DOJ’s inquiry for information. Here is perhaps the reason why it recently appointed former USAF Secretary and a fine connoisseur of the Hill and the federal government Michael Montelongo to Board of Directors. By drawing such negative attention to Herbalife’s business model, Ackman could be eventually winning his battle as Herbalife may now be navigating rough waters. Consequently, the war might have just started for Herbalife’s future.