Herbalife tanks on 'pyramid scheme' criticism

The weight-management company sees shares fall nearly 13% after a high-profile fund manager questions the business.

By Kim Peterson Dec 19, 2012 4:28PM
Image: Woman on scale (Zave Smith/Corbis)Updated 4:30 p.m. ET

Herbalife
(HLF) plunged nearly 13% Wednesday after one of the world's most prominent fund managers said he's betting against the weight-management company. By market close, however, shares had recovered to about a 5% loss.

Bill Ackman, who's in charge of $11 billion in assets at Pershing Square Capital Management, confirmed that he's taken a short position in the stock. Short sellers borrow shares and sell them, holding out hopes of buying them back at a lower price and then returning them. Essentially, short sellers target stocks they think will lose value fairly quickly.

Ackman told CNBC that he's been researching Herbalife and thinks it's a "pyramid scheme." He said he has been short on the shares for seven to eight months. Herbalife sells protein shakes and vitamin supplements, among other products.

Ackman is expected to share more thoughts on the stock at an investment conference Thursday in New York, CNBC reported.

Ackman is a high-profile investor and his word is taken very seriously on Wall Street. He has an activist bent, often pressing for changes at companies he's interested in. The Globe and Mail recently named him 2012 CEO of the year, saying that in Canada he is a "boardroom barbarian who toppled four-star corporate generals at one of the country’s most historic companies."

Herbalife has been in Wall Street's doghouse since May, when another famous short seller, David Einhorn of Greenlight Capital, asked pointed questions about operations in an investor conference call. The stock went from more than $70 to $53 that day, and has continue falling since to $38.05 Wednesday.

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Tags: Investing
76Comments
Dec 19, 2012 6:05PM
Dec 19, 2012 5:59PM
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A pyramid scheme is a non-sustainable business model that involves promising participants payment or services, primarily for enrolling other people into the scheme, rather than supplying any real investment or sale of products or services to the public.  If a company offers a product for sale, it's not a pyramid. Lots of products out there that are debatable as to their value, but obviously if no one buys, the company dies.
Dec 19, 2012 5:51PM
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I have been taking Herbalife products for over 5 years. I am a distributor with a discount for buying directly from the company. I am more concerned about my personal health and that is why I consume the supplements and the protein shakes. I do not go to meetings and attempt to "sign up" possilble distributors or customers. This is personal to me and if someone does take these products I personally believe you will improve your health. I know the difference with and without these products. I do not care about selling anyone anything, but I am concern about health.
Dec 19, 2012 5:47PM
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Everybody's crook these days. I don't trust anybody except my cats.
Dec 19, 2012 5:45PM
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 If you bash a stock on blogs that you're shorting to manipulate the price you can be fined and jailed. Why can a fund manager do the same thing with no proof? He probably made millions today simply by declaring his suspicions yet offered no proof on a company he's been shorting 7 or 8 months. I have no opinion on this company but it still seems nore designed to make his bet profitable than to expose anything.
Dec 19, 2012 5:22PM
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Yes STUPID! Herbal life, Shacklee, and all that other crap is pyramid schemes and offering a money back warrenty for a loophole does not change that fact one itty bitty bit!
Dec 19, 2012 5:10PM
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Herbalife isn't a "pyramid scheme", its a scam (a worthless product sold as being of value) pure and simple
Dec 19, 2012 5:09PM
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How could it possibly take anyone this long to figure this out...? If this wasn't obvious as well as all the other MLM crap, this guy needs a new occupation.
Dec 19, 2012 4:50PM
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Great...just as they announced they are hiring 500 workers at the old Dell facility in Winston-Salem NC.
Dec 19, 2012 4:49PM
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Why dosen't he just leave the Company alone.My Hamster happens to enjoy his Habitrail and we love watching him run around in all of those little tubes.What Honey ????? Oh??? Never mind.
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