Hedge fund manager Bill Ackman, who runs Pershing Square, gave another presentation on Herbalife.
This time it was on Herbalife's business practices in China.
Pershing Square says they have done an investigation and that they have evidence that the company is operating in violation of Chinese law.
"The report will show that Herbalife’s business in China operates much like the company’s business in the rest of the world – as a pyramid scheme," Pershing said in a press release.
NYTimes' Front Page Article
The first thing he did was address yesterday's New York Times front page article. The article was about Ackman lobbying folks to help him bring about an investigation into Herbalife that would bring down the company.
Beginning in the summer of 2013, Ackman said that he and his legal counsel went to Washington D.C. to meet with lawmakers. He said they did it to raise the profile of Herbalife and the increase the chances that the FTC and other agencies would investigate the company.
Ackman pointed out that he has the right to petition the government and to free speech. He said the law requires him to hire lobby firms if he spends more than a certain amount of hours lobbying congress.
Three members of congress wrote letters in 2013.
In October 2013, Ackman said that he and his senior counsel David Klafter met with Senator Markey (D-MA)'s staff. His political conferences suggested they meet with the senator because he's "concerned with consumer protection", Ackman said.
He said that they told Markey's staff that they were short the stock and he would give any profits he made personally to charity during an hour-long meeting.
In January, Markey put out three letters to Herbalife CEO Michael Johnson and the chairs of the SEC and the FTC.
The stock dropped about 14% after the letters were released.
"I believe the stock price dropped because it was clear from Markey letter compared with other letters that his staff understood the important questions that needed to answered in order to determine whether or not Herbalife is violating the law," Ackman said.
Ackman says he's never given any money to Markey. He says he's been a larger supporter of the Democratic Senatorial Campaign Committee, though.
What's more is Ackman says he just learned that his sister had donated $500 to Markey. He said he had no prior knowledge before the NYTimes article.
China Business Practices
David Klafter, Pershing's legal counsel, went over Herbalife's presence in China since 2001.
He noted that China has strict laws for direct-selling. Klafter alleges that Herbalife's violates China's direct selling and pyramid sales laws.
Here's what he thinks their investigation finds:
For their investigation, Pershing Square retained OTG research. Aaron Smith-Levin, a researcher from OTG Research Group, said their staff in China met with over a dozen distributors there to gather their findings.
He concluded, "Based upon Herbalife's own internal documents, Herbalife does not calculate China Sales Employees (a/k/a China royalties) based upon "Hourly Consulting Fees." Instead, Herbalife calculates royalty compensation in China as percentages of Retail sales... just as Herbalife calculates royalty overrides in the rest of the world."
Questions for Ackman
Ackman took questions via email. He had a total of 74 questions.
Someone asked him if there's anything that would cause him to change his thesis on his Herbalife bet.
Ackman says he has not learned one new fact that's inconsistent with his original thesis that the company is a pyramid scheme.
"There's no circumstance under which we are wrong on whether or not Herbalife is a pyramid scheme. There's investment risk with respect to Herbalife. There's no certainty the government will investigate the company...I believe if the FTC, or the SEC or state attorneys general investigated Herbalife and looked into the issues we've identified there's a certainty the company would be found in violation of U.S. law, Chinese law, other law and the government would work to shut the company down. What the government does we have no control over. That is the investment risk in this situation."
Another person asked him what makes him think the FTC will shut down Herbalife knowing that a hedge fund manager will make a lot of money.
Ackman believes that they will have to investigate. He said that yesterday's page 1 NYTimes story was not his favorite, but he it was "helpful." He thinks regulators will have no choice but to probe the company.
Another listener asked him about doing another activist short. Ackman said he doesn't know if he'll do another activist short. Ackman said that folks attack your "reputation and your integrity." He added that the New York Times also writes "nasty articles" about him. This also happened to him during his MBIA short. He was criticized in the financial media, but ultimately ended up being right.
Taking Herbalife 'To The End Of The Earth'
In late 2012, at a special Sohn Conference event, Ackman publicly declared that Pershing Square was shorting $1 billion worth of Herbalife stock. In a 342-slide presentation, Ackman laid out his thesis that the company operates as a "pyramid scheme" that targets lower income individuals, particularly from the Hispanic population.
It's his belief that regulators, specifically the Federal Trade Commission, will be persuaded to investigate and shut the company down.
Herbalife has denied Ackman's allegations.
What's more is a number of hedge fund managers, most notably Ackman's rival Carl Icahn, have snapped up significant long positions in the stock.
The Herbalife short has been Ackman's "biggest loser" in his hedge fund's history. Since Ackman revealed his short position, shares of Herbalife have surged. So far, he's suffered an estimated $500 million in paper losses.
He's continued to say that he will take this short "to the end of the earth."
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