The mystery of Herbalife deepens

A re-audit of the company's financial statements will need to be done by a new accounting firm.

By TheStreet Staff Apr 11, 2013 12:52PM

thestreet logoGrocery shopping copyright Jupiterimages, JupiterimagesBy Marc Courtenay

 

As the unflappable rock-and-roller Jerry Lee Lewis might sing, "Goodness, gracious, great balls of controversy" if he wrote a song today about Herbalife (HLF).

 

Billionaire activist investor Carl Icahn, who indirectly owns over 16.35 million shares (as of March 8, 2013, making him a "beneficial owner," which signifies his stake exceeds 10% of the outstanding shares) may be singing a different part of the same song.

 

If I owned 10% or more of HLF, I might be singing, "You shake my nerves and you rattle my brain, too much love [think HLF] drives a man insane. ..." Icahn's big bet on HLF puts him in direct opposition to a longtime rival, hedge fund manager Bill Ackman, who took the "short side" of the HLF bet. 

 

Their ongoing feud is legendary, but the mystery that enshrouds Herbalife keeps getting more curious with every passing day. Back on Feb. 15, Icahn told CNBC that his investment in HLF wasn't about his unmasked dislike of Ackman.

 

"I'm not going to lie to you and say that if Ackman gets squeezed, I'll feel very sorry and cry and do penance," Icahn said on CNBC that Friday. "But that's not the reason I'm doing this." He described HLF as a financially fit company that had potential for continuing growth.

 

He even referred to HLF as "a quintessential example of a company that should be taken private." Then he added that it was his opinion (and he voted with his wallet on it) that Herbalife sold good, quality products.

 

Herbalife is a network marketing company (sometimes referred to as "multi-level marketing") that sells weight management, healthy meals and snacks, sports and fitness, energy and targeted nutritional products as well as personal care products worldwide.

 

Herbalife has been back in the headlines, this time due to news that broke April 9 that a partner at the accounting firm KPMG had allegedly been caught in some kind of insider trading scandal. This was the reason given for the auditor's resignation from both Herbalife and SkechersUSA (SKX).

 

Shares of HLF were temporarily halted on the news. It was also reported in April 10's Wall Street Journal that an email received late Tuesday from a former KPMG partner named Scott London, who had been in charge of the audits of Herbalife and Skechers, said he "regrets my actions in leaking non-public data to a third party."

 

The Journal story mentions that London said his "leaks ... started a few years back" and he added that KPMG bore "no responsibility" for his actions. The FBI and the SEC are reportedly "investigating allegations of insider trading in the shares of certain KPMG clients, said people familiar with those probes."

 

Since Herbalife has been mired in the much-publicized verbal sparring between Icahn and Ackman, the reports and the temporary halting of trading have put the kibosh on HLF's share price. On April 8, shares of HLF closed at $38.39 on only 859,400 shares traded. 


Once the rumors and news reports began flying April 9, a different picture unfolded: 5,877,800 shares traded in a range between $36.21 and $38.95 and finally closed at $36.95. On April 10, the stock closed at $37.20 on less than half of the average daily volume of 6.4 million shares.

 

Herbalife reports first-quarter earnings April 29 after the market closes. Analysts estimate, on average, an increase in earnings per share of over 20% to $1.06. Revenue will rise more than 15% to $1.11 billion, they say.

 

Looking at the one-year chart of HLF, you can see the effects of the dichotomy between the diluted, year-over-year EPS and the trailing 12-month revenue-per-share. Add in the saga of Icahn versus Ackman, and you have a picture that's either fraught with peril or ripe with opportunity. 

 

 

herbalife chart

 

This is an ongoing story that offers both entertainment value and possible volatility for shareholders and potential investors. The importance for publicly traded companies like HLF and SKX to produce confirmations of the audited financial statements under these circumstances seems essential.

 

Most likely a re-audit of their financial statements will need to be done by a new accounting firm, which will no doubt be rather expensive. Look for news from both as to how, when and at whose expense this process will be completed.

 

Traders may find many opportunities to "buy the rumors and sell the news," as this situation and the yet-to-be-resolved tug-of-war between the mighty activist investors continues. I'm putting a note on my desk to keep a close eye on HLF, especially between now and April 29. Get ready, get set, not quite yet!

 

Disclosure: As of the time of publication, the author wasn't long or short shares of any of the companies mentioned in this article.

 

 

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31Comments
Apr 11, 2013 4:12PM
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Industries like this one are 99% Snake Oil and should be shutdown. The owners of this corporation are parasites living on the ignorance of consumers.
Apr 11, 2013 4:42PM
Apr 11, 2013 9:33PM
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About 10 years ago, I was almost suckered into working for this Ponzi/Pyramid scam of a company. I was dating a woman who was already selling Herbalife products and she convinced me to attend one of her recruiting meetings. All it was, was one vendor recruiting more vendors and you receiving a commission for every vendor you signed up. The new vendors that signed up, were now requiered to buy Herbalife products and obviously try to sell the products. The new vendors were also highly pushed to recruit new people and the routine would start again.
Apr 11, 2013 4:44PM
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Herbalife is pimping their "employees"/ vendors.

 

Carl Icahn and Bill Ackman are pimping people that PLAY the stock market.

 

In any event, people have the right to be stupid.

Apr 11, 2013 7:35PM
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Bought some Heralife pills 20 yrs ago. They didn't do anything except give me gas & make my pee glow in the dark. Thought it was kinda suspicious---a guy selling weight loss products out of his garage. Reminded me of another pyramid scheme---Amway. Now, all the various radio talk show hosts on both sides of the political spectrum are selling their advertising under the guise of Workathome.com. I wouldn't poison the water table by flushing them down the toilet.

 

Apr 11, 2013 6:55PM
Apr 12, 2013 11:48AM
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If you're a good salesman and have a hard shell, this business is good for you, what I don't like is how they say that everyone can succeed, I guess it's part of the strategy of getting more people under you.  You have to have the right personality, skill and patience to make it.  That said, if you can make it happen, more power to you!  I haved more success with my college degree and running my construction business and my brother has more success with Multilevel.  In either case, you have to work hard and the more you work the more success you have.  Capitalism at it's finest!
Apr 11, 2013 11:02PM
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hey Dain. You were probably full of it before, so call it a diet.
Apr 12, 2013 1:04PM
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Herbalife is made up of a bunch of used car salesmen and motivational speakers. They make you feel like you could sell ice cubes to an eskimo but in reality it not that easy to sell overpriced products that are "not intended to treat or cure any disease" and have not been tested by the FDA. Unless you can experience real benefits for yourself (which i never could), it's hard to convince someone that the products are any good.
Apr 12, 2013 11:52AM
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Surprised anyone would invest that much in Herbalife, they reak of a scam product. But then again no one ever went broke betting on the stupidity of the average consumer.
Apr 12, 2013 10:30AM
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What!!!  Wall Street is crooked?   Shouldn't that be the headline? 
Apr 12, 2013 11:34AM
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Nearly 30 years ago Herbalife was hawking its wares in the Pacific NW. Not only was I reading labels, but researching ingredients and their chemical interactions... Try Mrs. Grieve's Herbals and you will find that Herbalife's ingredient list carried 'Guarana' similar in effects and composition to Cocaine... Duh, Why else would such an innocuous product hold such appeal for so long?
Apr 12, 2013 2:23PM
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If Icahn owns ANY PART of it, take your money and run before he steals every cent and bankrupts the company.     TWA and many more have learned the hard way that Icahn invented SNAKE OIL.

 

AND HE OWNS ENU BANKRUPTCY JUDGES TO GET AWAY WITH ANY SCHEME HE CHOOSES TO PILFER THE COMPANY THEIR PENSION FUNDS, AND ANY OTHER METHOD OF CHICANERY.

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How did the young man die who started Herbalife? doe's anybody know?
Apr 12, 2013 1:36PM
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There's no mystery - it's a scam.  Just like Isagenix and the rest.

Apr 12, 2013 3:56PM
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SEC maybe should look into KPMG & Ackman & JCP .
Apr 12, 2013 10:12AM
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Winston-Salem is betting big on Herbalife and trying to get it to move into the now vacant Dell computer plant. But they are not known for bright moves according to some longtime residents.
Apr 12, 2013 11:55AM
Apr 12, 2013 1:19AM
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Amway made more than a few people rich. I'm sure Herbie did the same. Viva capitalism.
Apr 11, 2013 9:17PM
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God Bless Mark Hughes, Dr Lou Ignarro, and the late Jim Rohn and all the dedicated people of Herbalife. Thank you for being the first to promote small changes into a lean protein, low good carb, nutritious diet, enforcing positive life changes that allow you take control of your health, feel great, and live longer. Every product you see came from the Herbalife Inventory and research 35 years ago! Always imitated, never duplicated.  Go ahead, and use that excuse that it made you fart. Go ahead and buy $120 + monthly of those doctor prescribed "good pills" go ahead and buy the $290 per American, per year of the, over the counter digestive aids. I'm going to ride 28 miles on my bike after work, you just watch for your favorite tv commercial. Hey ... How many times did you fart on your way to becoming 265 lbs. any way??

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