Herbalife spurs hedge fund strife

  • Article by: ANDREW ROSS SORKIN and MICHAEL J. DE LA MERCED New York Times
  • January 9, 2013 - 8:59 PM

The battle over Herbalife is becoming a clash of hedge fund titans.

Daniel S. Loeb's Third Point Management disclosed Wednesday that it had acquired more than 8.2 percent of the nutritional supplements company, or nearly 9 million shares, betting they will go up. After the news was released, Herbalife's shares rose as much as 9 percent in morning trading and were trading up 5 percent at midday.

That puts the voluble activist hedge fund magnate squarely at odds with his friend William A. Ackman, who has contended that Herbalife is "the best-managed pyramid scheme in the history of the world." Ackman's Pershing Square Capital Management has sold short about 20 million shares, and he said recently that he had covered none of them thus far.

Loeb's disclosure comes the day before Herbalife is scheduled to make a major presentation to investors, its first big rebuttal of a three-hour broadside delivered by Ackman on Dec. 20. Loeb met with company executives soon after Ackman's campaign against Herbalife began, according to people briefed on the matter.

The looming battle between the two promises to be the biggest test yet for the 32-year-old company, which sells nutritional supplements and personal care products through networks of independent resellers who gain incentives by recruiting other resellers.

One blogger, John Hempton of Bronte Capital, has characterized the struggle over Herbalife as "the hedge fund equivalent of Stalingrad," as investors pile into the company's shares.

Ackman's major contention is that Herbalife distributors make more money from recruitment than from sales to customers outside the network. With few retail sales, he argues, the company qualifies as a pyramid scheme that the Federal Trade Commission is obligated to shut down.

Others think differently. Herbalife's stock is now up 2.7 percent since Dec. 20, suggesting a belief that Herbalife will weather its toughest storm yet.

Robert Chapman, the founder of Chapman Capital, wrote a blog post this month about why he has made a "monster" bet on Herbalife shares going up. He argued that the FTC was unlikely to take up Ackman's crusade and legally challenge the company's marketing tactics.

"Without the FTC taking injunctive actions against HLF," Chapman wrote, referring to Herbalife's stock ticker, "Ackman's crusade toward 'zero' is doomed."

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