Hedge fund manager Bill Ackman outlined why he and his team of analysts have dubbed the nutritional supplement company Herbalife (HLF) as a "pyramid scheme" at a conference in New York Thursday morning.
Herbalife's stock dropped nearly 4% Thursday, its second straight day of sharp drops. The vitamin maker's stock dropped more than 12% Wednesday, after CNBC reported that Ackman had been betting against the stock for most of 2012. Roughly 20 million shares of the company changed hands Wednesday, compared to typical volume of 3 million.
Later Wednesday, Herbalife's CEO and chairman Michael Johnson pushed back in a press release. "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."
Herbalife's rebuttals didn't do much to assuage the concerns of StockTwits traders though.
Ouch. Enron comparisons are never good for a stock.
In a presentation that ran for more than three hours, Ackman said that the sellers or distributors of Herbalife's products generate the majority of their income by recruiting new salespeople not by selling products, i.e. a pyramid scheme. Ackman will donate profits from his short position to charity. The first $25 million will go to the Ira Sohn Foundation, a non-profit dedicated to pediatric cancer research and treatment. Anything above that will go to Ackman's personal foundation, the Pershing Square Foundation, dedicated to fighting poverty.
It's not the first time that Herbalife's business model has been questioned. Famed short-seller David Einhorn of Greenlight Capital popped up on a Herbalife conference call earlier this year, and asked about the company's accounting practices. Investors were quickly spooked. Einhorn has not publicly spoken about the stock since then.
One StockTwits trader noted that Einhorn has had a more significant effect on the stock without even talking about it.
Perception isn't everything though. Ackman is typically more focused on calling for corporate boards to shake up management or to sell a company. Ackman pushed the board of JC Penney (JCP) to hire Apple's (AAPL) former retail chief Ron Johnson to lead a turnaround there. Ackman hasn't convinced investors that the turnaround is working. JC Penney's stock is still down 45% this year.
So if Herbalife's business model is legit, the market could eventually believe it. Ackman is not perfect.