Herbalife Ltd.'s shares fell sharply in heavy trading Wednesday on reports that hedge fund manager William Ackman is shorting the company's stock and believes Herbalife is a pyramid scheme.
THE SPARK: Ackman, founder and CEO of Pershing Square Capital Management L.P., disclosed that he has a short position on Herbalife. The news was first reported by CNBC. A representative for Pershing confirmed the short position but was not immediately able to give further details.
Ackman is expected to provide more information at the Sohn Conference Foundation investment meeting on Thursday.
THE BIG PICTURE: Herbalife sells nutrition and weight-loss products through a global network of distributors.
Herbalife Chairman and CEO Michael Johnson said in a statement that the allegation that Herbalife is a pyramid scheme is "bogus".
"Make no mistake: Today's announcement isn't about Herbalife's business model. It's about Bill Ackman's business model," Johnson said.
Johnson said the company found that a large number of puts options on its stock are due to expire this Friday. Ackman is expected to make his presentation the day before those expire. The company also said that it has been informed that Ackman has shorted its stock for the past seven to nine months.
Herbalife said it asked Ackman to allow Herbalife participate in his presentation but Ackman declined.
The company is urging the SEC to investigate the events. It says this appears to be "yet another attempt to illegally manipulate the market by overzealous short-sellers."
This is not the first time that Herbalife's business model has fallen under investor scrutiny.
In May, hedge fund manager David Einhorn, criticized the company during an investor call, raising concerns that the company's stock may become a target for short-sellers. Einhorn asked how much of the Los Angeles company's products are sold to consumers who aren't distributors, and he asked why Herbalife did not disclose a breakdown of difference types of distributors as it usually does.
SHARE ACTION: Shares of Herbalife fell more than 12 percent to close at $37.34 Wednesday. They have lost half their value since peaking at $73 in late April.
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