Battle of the hedge funds centers on L.A.'s Herbalife*

herbalife2.jpgThis is pretty intramural stuff for those of us who don't have stakes in Herbalife, the billion-dollar-plus distributor of nutritional products. Still, it illustrates how two high profile hedge fund managers can overwhelm a stock. As you might know, Bill Ackman has been shorting Herbalife - that is, he's been borrowing shares on the bet that prices will go down (which they have). Ackman has blasted the company, calling it an pyramid scheme and asking the government to investigate. But today came word that another well-known hedge fund manager, Dan Loeb, was going long on Herbalife, snapping up an 8.2 percent stake. The stock is up more than 4 percent in early trading after taking it on the chin in the days following Ackman's tirade. From DealBook:

Mr. Loeb's disclosure comes the day before Herbalife is scheduled to make a major presentation to investors, its first big rebuttal of a three-hour broadside delivered by Mr. Ackman on Dec. 20. Mr. Loeb met with company executives soon after Mr. Ackman's campaign against Herbalife began, according to people briefed on the matter. The looming battle between the two promises to be the biggest test yet for the 32-year-old company, which sells nutritional supplements and personal care products through networks of independent resellers who gain incentives by recruiting other resellers. One blogger, John Hempton of Bronte Capital, has characterized the struggle over Herbalife as "the hedge-fund equivalent of Stalingrad," as investors pile into the company's shares.

Herbalife has always been an oddball company. It was started more than 30 years ago by a guy named Mark Hughes, who says he got interested in weight loss and nutrition after the early death of his mother. Hughes was one of those "I'm here to save the world" types, but Herbalife became less of a health products company than a marketing and distribution juggernaut in which the shakes, snacks and powders were sold door-to-door or through word-of-mouth - thus eliminating the retail middle man. Ackman argues that even today Herbalife distributors make more money from recruitment than from sales to outside customers. Hughes died mysteriously in 2000 from an overdose of alcohol and the anti-depressant doxepin, The news came as a shock to Herbalife's acolytes, raising still more questions. A former Disney executive was brought in settle things down, which he did, but there's always been a shadowy aspect to the way Herbalife makes its money. Clearly, there still is.

*Here's what Loeb thinks of those pyramid scheme claims (from the NYT):

The pyramid scheme is a serious accusation that we have studied closely with our advisors. We do not believe it has merit. The short thesis rests on the notion that the FTC has been asleep at the switch, missed a massive fraud for over three decades, and will shortly awaken (at the behest of hedge fund short seller) to shut down the Company. We find this thesis to be preposterous, particularly since the FTC has been sensitive to frauds of this kind. Since 1997, the FTC has brought 13 separate cases against alleged pyramid schemes.

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Mark Lacter
Mark Lacter created the LA Biz Observed blog in 2006. He posted until the day before his death on Nov. 13, 2013.
Mark Lacter, business writer and editor was 59
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