The curious case of financial notes come back to bite Herbalife. The company operates a MLM-style model not all that different from AmWay, Scentsy, or Thirty-One handbags, by recruiting sales people to sell products direct to customers. Sales people are also rewarded for recruiting more salespeople underneath them.
Herbalife is and was engaged in very questionable financial reporting. As reported by Barron’s in May, the company hid significant amounts of data, explaining the hide and go seek in the financial notes (the obscure part of financial filings few people read, although everyone should.) From Barron’s:
Nu Skin’s and Herbalife’s annual reports disclose the commissions earned by their U.S. distributors. But the disclosures by both firms tabulate commissions for only a top fraction of their networks—giving a distorted picture of what a distributor could expect to earn. Only by digging into the footnotes of those reports, and checking other filings at the Securities and Exchange Commission, can you estimate that the tables leave out 90% of Herbalife’s distributors and almost 95% of Nu Skin’s.
Bill Ackman ran with this, calling Herbalife a pyramid scheme because it made many participants rich at the cost of later participants who make little to nothing. The stock dropped more than 10% on Wednesday, and another 10% on Thursday as Ackman gave a presentation on the problems at Herbalife. The live blog of the event is especially interesting.
Herbalife’s CEO isn’t happy, threatening to bring legal action against Ackman’s Pershing Square, one of the best value-oriented hedge funds in the world. Ackman defensively ended his presentation with a chart showing the Herbalife’s chief executive selling $140 million HLF shares since 2007. If anyone is going short the stock, it’s the management. Score one for the hedge fund world, zero for pyramid schemes.
If you couldn’t tell, I have mad respect for Bill Ackman. His performance speaks for itself, and I find his method of finding future analysts interesting. He reportedly hired a man he met in a cab as well as a fly fishing guide to work at Pershing. Oh well – 24% per year says he’s doing something right.
- ADP (the blogger known as Automatic Data Processing 😉 ) says that it’s easier than you think to lose a million dollars. I agree – and that Chris Rock video his hilarious!
- PK asks “is Social Security is a good investment?” I say no. I think Social Security is the reason for the wealth gap.
- Andrew writes of the silliness at Delta Airlines. No love for airlines from me!
- Nelson slams share buybacks in a post on why investors should hate share buybacks. I like them, but it’s always good to have balance.
- Sam ran an excellent post on reducing (and actually noticing!) the true cost of 401k fund fees.
- Darwin writes about robots taking your job. I think it’s possible, and really fear what happens when manual labor is 100% replaced by robotics.
Articles I wrote elsewhere
Check out some of the articles I wrote elsewhere including:
- Merger Arbitrage ETFs at ETFBase
- Socially Responsible Investing: Where’s Your Limit?
- Bad Investment Opportunities at 20sFinances
- How to Do Stock Market Research at Investor Junkie as well as a post explaining bond ratings.