Tuesday, February 5, 2013

Comment on the false New York Post story about the law enforcement investigation against Hebalife

About twenty four hours ago I was alerted to a story in the New York Post by Michelle Celarier asserting that Herbalife was the subject of an enforcement action. To quote:

The Los Angeles-based distributor of nutritional products is the subject of a law enforcement investigation, The Post has learned. 
The existence of the probe emerged after the Federal Trade Commission, responding to a Freedom of Information Act request by The Post, released 192 complaints filed against Herbalife over the past seven years. 
The FTC redacted some sections, saying it didn’t have to divulge “information obtained by the commission in a law enforcement investigation, whether through compulsory process, or voluntarily ...”

This story was false. But lets go to the original source - the information released by the Federal Trade Commission (FTC).

The key document - the source of the New York Post story - was on page 719 of 720. Here it is the key bit - a photograph:

To quote directly:

We have located 717 pages of responsive records. I am granting partial access to, and am enclosing copies of, the accessible records. Fifteen pages, and portions of other pages, are subject to two of the nine exemptions to the FOIA's disclosure requirements, as disclosed below. 
I am withholding 15 responsive pages which are exempt from disclosure under the FOIA Exemption 3, 5 U.S.C 552(b)(3), because they are exempt from disclosure by another statute. Specifically, Section 21(f) of the FTC Act provides that information obtained by the Commission in a law enforcement investigation, whether through compulsory process, or voluntarily in lieu of such process, is exempt from disclosure...

The FTC found 717 pages of responsive records. It withheld 15 pages because they were exempt from disclosure because they were found pursuant to a law enforcement investigation.

On this flimsy evidence and no more the New York Post concluded that Herbalife was itself subject to a law enforcement investigation.

The text says nothing of the sort.

Indeed the text proves comprehensively that Herbalife is not subject to a law enforcement investigation.

The way you see that is obvious. When the government asks for documents using a subpoena or the threat of subpoena how many documents do you think you supply? The usual story is truck-loads. Fifteen hundred pages of documents would be typical in a very minor case. Fifteen thousand pages would be more typical. 15 truck loads is not unknown. Discovery is very expensive.

The fact there were only 15 pages of documents gives you the answer you need. These documents may have been found subject to a law enforcement investigation but the law enforcement investigation was not against Herbalife and fifteen pages of documents came out as a by-product.

This was obvious enough to anyone who thought about it - and I purchased the stock for the bounce.

Michelle Celarier - the New York Post journalist - made an amateur mistake driven by simple failure at reading comprehension.

We all make those. Lord knows I have made mistakes. (And when I make them my clients lose money...)

But that is not how Michelle Celarier sees it. She blames the FTC language for her mistake rather than herself. Panicked investors, now wearing an unnecessary loss, might not be feeling quite so charitable towards Michelle and the Post - which I hasten to add is in many other respects a surprisingly fine paper.



Anonymous said...

And bouce it did...

HumpOnDumpSellIntoPump said...

I love HLF and the many wonderful trading opps it has offered as well.

I also bought on the dump, but sold most into the pump (left a little on the table).

USNA reports after the close and may give us all an indication of the health of the MLM business in both N. America and Asia.

On the NYPost, it's publish or perish. 3 "hot copy" a week stories minimum.

Anonymous said...

You think the NY Post is a fine paper? Newspapers must be horrible in Australia!

Anonymous said...

And Bill Ackman commented on this...

Anonymous said...


...and what about the reports that surfaced on January 9 regarding an SEC probe?

Keep in mind that this comes after the SEC investigated Herbalife's 2011 10-K and decided not to pursue further action despite Herbalife failing to answer their key question regarding what is known as the "70% rule". Under this "rule" the company must prove that at least 70% of its sales to distributors are actually consumed or on-sold to external customers in the period. This is considered a critical component of proof that a company is not a pyramid scheme.

It would be great to get your view on the above.

Anonymous said...

From Bill Ackman this morning (morning in the Eastern time zone)...

30+ pages of questions for Herbalife

Anonymous said...

I've been through every question, there is nothing new what so ever in these 38pages. Some questions are borderline childish but most are fair for anyone not familiar with direct sales or the commission plans in multi level marketing companies.

Anonymous said...

Will we see a DIRECT response to all of the questions raised by Pershing Square in the last 24 hours?

So far the Hefbalife longs have done a great job of dancing around the key issue (ie do distributors get paid primarily for recruiting) so I would be very interested to see the response from one of the many ardent Herbalife supporters. I am probably being too optimistic....judging by the level of research and analysis being conducted by the Herbalife bulls I doubt any of them has even taken the time to read PSCM's entire 40 page document.

I have made this point many times before - only Herbalife actually KNOWS the answers to the questions posed given the questions require access to non-public Herbalife information. Given 1) none of the investing public know the answers, 2) the information required to answer the questions is not disclosed by Herbalife, 3) Herbalife have refused to address the key compensation issue and 4) like it or not PSCM's analysis has raised a number of red flags, how can any self respecting "investor" confidently buy Herbalife shares??

Anonymous said...

Dear Anonymous

HLF has made it perfectly clear several times that noones gets paid for recruitment.

The minority of the distributors called sales leaders do get commissions for the sales made in their networks, and some of that sales volume is indeed generated by happy self-consuming distributors, like a consumer club. They are not loosing any money or "suffering" like Ackman wish you to believe. It is not the same as "being paid for recruitment" and FTC is perfectly fine with these wholeseller commissions. A pyramid scheme just rolls up cash along the pyramid without any serious product exchange or usage. Herbalife is an absolutely normal wholeseller business, adding a customer relation value to their product.

I trust you know that this is not the first attack (and certainly not the last) on a a legit MLM company (or on HLF). It is an easy target for any strong hedge fund and thus most MLM companies are private, not publically traded.

Carl said...

Now I really see what you mean by hedge fund porn!! I have a small long in HLF ... it looks very very cheap (upside perhaps 100 - 150%) but Ackman is 'right'. However, probability of anything happening? << 50%; as you said, there are lots of scumbags out there. Apparently there are many MLM schemes, and HLF have a product, its just that gross margins perhaps should be no-where near 80%! Probability of a short-squeeze with Loeb and others buying? > 50%. And now Icahn has launched his attack. This is legendary stuff!

Carl said...

out of my long in the big squeeze. May buy some back on Monday ... We will see; ~+15% is a nice little gain for what was always a trade rather than an investment given the questions over the long-term business model.

Unknown said...

You have really stirred up a hornet’s nest! See the many buzzing going on here.. I am certain you like all the attention!

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