You may think of Herbalife as a company that sells protein shakes and vitamins, which has used a “multilevel” marketing approach to become one of the biggest players in the health food business. It has generated very large margins from its sales to both distributors and the public.
Wall Street views it differently.
Right now a tremendous battle is brewing between two Wall Street hedge funds. One of them claims the company is a complete fraud and the other one claims it is the best thing since sliced bread.
The two firms are run by adversaries and it is not the first time they have hooked horns. The antagonist in the battle is William Ackerman, who has declared Herbalife is “pyramid scheme” and has been selling the company’s stock with both hands. The “White Knight” is Daniel Loeb who believes it is a legitimate business model that creates mounds of cash.
The key to the argument is how Herbalife generates its profits. Does it in fact sell to a retail base, or do the distributors recruit people in a pyramid fashion and the new distributors buy the product to get involved in the business? Other pyramid marketing deals have appeared in the past fifty years, many of them turned out to be “Ponzi” schemes ending with the promoters being tossed in prison; others were legitimate deals that have prospered to this day.
Each side is claiming the other party is distorting the facts and to make things spicier the SEC’s enforcement division has reportedly begun to look into the dealings of Herbalife.
Only one thing is sure at this point, someone must lose, but it will not be a $5 Nassau. These guys are slinging around billions of dollars and in the end one of them is going to take a major hit.
This could be the Wall Street show of the year!
Keep those stops tight.
Todd “Bubba” Horwitz