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Herbalife shares rise above price when Ackman made allegations

The Los Angeles nutritional products company's shares plummeted in December after hedge fund manager Bill Ackman accused it of operating a pyramid scheme.

May 07, 2013|By Stuart Pfeifer, Los Angeles Times
  • Distributors line up at the main counter at the Herbalife Distribution Center in Carson. The company says most of its distributors do not intend to make a living selling its shake mixes, vitamins and protein bars. Instead, they sign up as distributors to receive discounts on products they personally consume.
Distributors line up at the main counter at the Herbalife Distribution… (Mark Boster, Los Angeles…)

Herbalife Ltd. shares gained 4% and traded part of Monday above the price they were when hedge fund manager Bill Ackman first accused the Los Angeles nutritional products company of operating a long-running pyramid scheme.

The company's stock price plummeted Dec. 19 after Ackman publicly disclosed that he had taken a $1-billion short position against its shares. In the four trading days after Ackman's announcement, the stock fell 43%, reaching an intra-day low of $24.24 on Christmas Eve.

Taking a short position involves borrowing shares at a high price and selling them, expecting to repurchase them later when the price falls and thus profit from the decline in stock prices.

The downswing in Herbalife's price created a buying opportunity for billionaire investor Carl Icahn, who immediately started acquiring shares and now owns nearly 16% of the company's stock.

He became an outspoken proponent for Herbalife, even engaging Ackman in an animated debate about the company's business model on television. Shareholders last week added two Icahn nominees to the board of directors.

Herbalife's stock has gained more than 20% since April 18. The company recently announced record earnings for the first quarter and raised its guidance for the year.

The stock closed up $1.64 on Monday at $42.64. Ackman has not disclosed the price at which he shorted shares, but several reports have put it at $45 to $50.

Ackman's argument is that most Herbalife independent salespeople lose money, while a fortunate few who got into the business years ago get rich, collecting commissions from the sales of those they recruited into the business.

The company said its multilevel marketing plan, used by many other companies, is perfectly legal.

Most of its distributors do not intend to make a living selling its shake mixes, vitamins and protein bars, Herbalife said. Instead, they sign up as distributors to receive discounts on products they personally consume.

stuart.pfeifer@latimes.com

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