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Just When We Thought Ackman, Herbalife Tango Was Over

If you are still scratching your head as to whether or not Herbalife (NYSE: HLF) is a pyramid scheme, join the club.

The Federal Trade Commission seemed to have reached a conclusion on the matter last Friday when Herbalife agreed to ante up $200 million as part of a settlement agreement with the agency.

However, now that the speed reading through the FTC’s report on Herbalife has waned, slower, more comprehensive reading of the report reveals that there are still issues that remain for Herbalife to resolve.

As the details of these revelations were exposed, the short-interest in the nutritional supplement’s stock picked up. Investors seemed to be questioning whether billionaire hedge fund manager Bill Ackman was correct in his multi-year long allegation that Herbalife is a pyramid scheme.

In fact, S3 Partners, which is a financial analytics, technology and services firm, found that the short-selling of the stock that slowed ahead of the report, has picked up again.
 

 · So what gives?

 
As rumors spread last Friday that the FTC would be releasing a statement that it found Herbalife to not be a pyramid scheme, the company’s stock began to soar. That stopped when the commission of the FTC stated:

“[Herbalife was] not determined not to have been a pyramid.”

Confused? Yes, we all were by that odd statement, including renowned hedge fund manager Carl Icahn who released his own statement that same morning saying the FTC settlement’s concluded that Herbalife is not a pyramid scheme.
 

 · Not so fast

 
The FTC quieted everyone that Friday morning with its official statement Herbalife “rewards recruiting at the expense of retail sales,” which is problematic for Herbalife and the entire direct selling industry.

Upon that news, Herbalife’s stock slid almost $6 from its opening price spike, closing at $64.26, notes to Howard Sugarman, a managing director for S3 Partners.

The question became, “Is this going to make this business model an issue for other direct sellers?” The model is also referred to as multilevel marketing. Other companies that have similar business models include Avon (NYSE: AVP), Nu Skin (NYSE: NUS) and USANA Health Sciences (NYSE: USNA).

Unsure what to make of the FTC’s news, many joined Ackman and began shorting Herbalife. However, they did not short it to the tune of Ackman’s $1 billion gander that Herbalife’s stock would fall to $0.

Herbalife’s amount of float that has been shorted is the highest among these three, at roughly 26%. Avon’s is just 6.4%, while USANA’s is 17.9%.

The increase in Herbalife’s short float is interesting. Sugarman found that short interest in Herbalife, which had dipped below $1 billion in the first quarter for the first time since January 2015, had been climbing in anticipation of the FTC declaring that Herbalife was primarily a pyramid scheme.

Since its mid-February lows, Herbalife’s short interest had raised almost $300 million, or 30%, even as its stock price rose 31% over that same time period, according to Sugarman.
 

 · Who’ll have the last laugh?

 
As noted above, Ackman has a $1 billion short position in Herbalife. Furthermore, despite the $200 million settlement, and the determination that Herbalife is not a pyramid scheme, Ackman won’t back down.

In fact, the manager of the Pershing Square Capital Management is “maintaining his bet against, according to Bloomberg Markets.

“Ackman plans to maintain it and will push regulators outside of the U.S. to investigate the company,” according to Bloomberg Markets.

Tired of defending itself, Herbalife released the following statement Wednesday:

“After more than two years of working with the FTC, I think we understand the terms of the settlement agreement very well. We would not have settled unless we had the greatest confidence in our ability to comply with the agreement and grow our business and we believe this will be proven out over time.”





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