What is the best line from Herbalife CEO Michael Johnson’s amazingly hostile call with CNBC this afternoon, in which he maintained that Bill Ackman is wrong that Herbalife is a pyramid scheme? I think the two leading contenders are:

  • “Mr. Ackman’s proposition that the United States would be better when Herbalife is gone? The United States will be better when Bill Ackman is gone.”
  • “Our customers are sometimes called distributors. That’s the only confusion that we have.”

Oh that’s the only confusion is it? That’s … confusing. “You’re a pyramid scheme; you only sell products to your distributors.” “No we’re not, we sell real products to real customers.” “Oh.” “But we call the customers distributors.” I’m looking forward to a confusing exchange of press releases.1

Johnson’s claim is that the whole presentation, and the leak thereof to CNBC, are about market manipulation: “an extraordinary number of puts” on HLF are due to expire this Friday, he claims, and Ackman’s presentation tomorrow is designed to basically juice those puts going into expiry (and, one might add, year-end). That … I mean, sure, whatever.2

Johnson wants the SEC to investigate – “who is looking out for the individual shareholder?” – and I suppose there are imaginable fact patterns where Ackman is just manipulating the stock. If in fact he was long a bunch of puts expiring on Friday, puts out an anti-HLF presentation on Thursday, HLF responds on Friday, and Monday he’s all “yeah sorry I was confused about your use of the term ‘distributors'; you’re quite right,” but has meanwhile made millions on his puts … that would seem pretty manipulative! But you can really only do that once, max.3 You can I suppose window-dress your year-end more than once.

But more likely you just, y’know, you make your case, and people believe it or they don’t, and the stock goes down or it doesn’t, and you make money or you don’t, and it’s a market and it clears. A lot of corporate CEOs believe that arguing for your long position is the American way, but that arguing for your short position is … well, at least that the United States would be better off without it, at most that you should go to jail for it. CEOs, being structurally long their stocks, would of course think that way. But it’s hard to imagine the SEC concluding that that’s manipulation. I mean, again.

One strange part of the brewing fight is Herbalife’s claim that they “have been informed that Mr. Ackman has shorted our stock for the past 7 to 9 months.” What … what does that prove? If you’re just manipulating a stock for a quick buck, why wait nine months to tell anyone about it?

Herbalife Disputes Ackman’s Claim of ‘Pyramid Scheme’ [CNBC]
Herbalife Company Statement Regarding Ackman Allegations [HLF]

1. Is Herbalife … y’know … a pyramid scheme? I SURE AS HELL DON’T KNOW. I can tell you that one or both of (1) Bill Ackman and/or (2) Michael Johnson knows better than I do, so go ask them. Or just read Herbalife’s 10K, as I previously did.a Just start right at the beginning:

We are a global network marketing company that sells weight management, nutritional supplement, energy, sports & fitness products and personal care products.


To be fair here is a sober analysis by a Northwestern marketing professor concluding that Herbalife is a legit direct-marketing firm, not an illegal pyramid scheme, because it’s actually based on sales of a real product rather than just recruiting.

a. Read footnote * there, from my pre-hyperlinking days. How far we’ve come! As has Herbalife, incidentally; it closed at $52.70 the day after Einhorn’s sally, and at $37.32 today.

2. Here are December puts:

Here are January puts:

I count about 53,000 December put contracts between $25 and $50, or 5.3mm shares; if the stock goes to zero by Friday then whoever owns them will make $200mm or so. Is that an extraordinary number of puts? I dunno; it’s a lot, and it’s like 70% more December puts than January puts – but then there are like 120% more December calls than January calls in that same price range. I feel like “ooh magic expiration dates” is not the explanation here? HLF equity SI shows 20.7mm shares of short interest in Herbalife as of the last exchange report.

3. Are there any examples of anyone literally doing that? Like, making a big public case against a big public company with a bunch of trades that expire before the case unravels? That would be strong.

29 comments (hidden to protect delicate sensibilities)
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Comments (29)

  1. Posted by gfgf | December 19, 2012 at 7:23 PM

    On a serious note – it does sort of sound like a pyramid scheme re: selling to distributors, but then again aren't most macro breweries/liquor distilleries using the same business plan of maker -> distributor -> retailer -> customer?

  2. Posted by hmjjbe | December 19, 2012 at 8:15 PM

    Look we all know I’m right about everything…if only Target would have spun off their real estate into a REIT, arghhhhh!

    -Bill “I’ve had one-to-many mojito’s” Ackman

  3. Posted by St. Copious | December 19, 2012 at 8:45 PM

    Not easy to be funny and informative/insightful Matt, but this was both.

  4. Posted by chris | December 19, 2012 at 10:43 PM

    Here's report on Shortzilla….

  5. Posted by Wire | December 20, 2012 at 3:30 AM

    How far we've come, indeed.

  6. Posted by Mr. Frankenberger | December 20, 2012 at 8:23 AM

    Yes, I believe a footnote explaining a footnote and the noting process in a previously posted article which was only referenced in a separate footnote is a new record in foot and note disease. Well done!

  7. Posted by Guest | December 20, 2012 at 8:43 AM

    Ever since Jon started I seem to enjoy Matt's posts more.

  8. Posted by PermaGuestII | December 20, 2012 at 9:23 AM

    That's because of a legal quirk in the marketing of alcohol post-prohibition: most states don't allow manufacturers of booze to sell directly to consumers.

  9. Posted by Kegels123 | December 20, 2012 at 9:51 AM

    Thank you Bill for my next short idea.

    Your friend,
    Whitney Tilson

  10. Posted by guest | December 20, 2012 at 9:58 AM

    So let me get this straight, I should be long a piece of shit retailer with sales declining 26% and losing money and short a company growing 13% with 16% operating margins?

  11. Posted by guest | December 20, 2012 at 12:39 PM

    Interesting true fact one oh Herbalifes founding member was tied into Amway founder for many years. Both good upstanding members of LDS church. LDS church 10% take now THATS THE NKI!

  12. Posted by Whit | December 20, 2012 at 1:11 PM

    I was long HLF before I was short it.

  13. Posted by P | December 20, 2012 at 2:37 PM

    What makes it a pyramid scheme is when there are few final customers but a multitude of distributors, with growth driven by the addition of distributors as opposed to the addition of customers. For a better example of this, read up on Visalus, a pure pyramid scheme poised to blow up at any minute.

    Two long but great articles: http://www.sirf-online.org/2012/11/the-infernal-mhttp://www.lazymanandmoney.com/visalus-scam/

  14. Posted by pick a name | December 20, 2012 at 3:18 PM

    yes, so just be quiet and do it.

  15. Posted by VonSloneker | December 20, 2012 at 5:46 PM

    I am unimpressed by both Bill Ackman's and the Diet Shake Pyramid business models…

    – McKayla Maroney, Outdated Meme Quant

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