hedge fund manager wants to short Herbalife, gets FTC to probe whether they're a pyramid scheme

[yurbud]

I hate pyramid schemes, and for all I know, Herbalife could well be one.

But when I heard a version of this story on NPR and that the hedge fund manager pushing the FTC investigation bet over $1 billion on Herbalife stock going down to zero, it seemed like another indication of the cancer in our financial sector and our government, because:

A) this asshole is trying to make a buck by breaking a business not making one

B) regulatory agencies and even Congress seem to only act when such an asshole wants them to.

Can someone explain to me why shorting like this is legal?

Herbalife hit by US ‘pyramid scheme’ probe
By Dan McCrum
The US Federal Trade Commission has opened a formal investigation into Herbalife, the multi-level marketing company that hedge fund manager Bill Ackman has called a pyramid scheme.

Close government scrutiny of the Los Angeles-based group is the latest turn in a vicious public battle where rival billionaires have bet fortunes on the question of Herbalife’s legitimacy since Mr Ackman’s hedge fund, Pershing Square, unveiled a campaign to put the company out of business in December 2012.

http://www.ft.com/cms/s/0/cdde3864-aa0e-11e3-8bd6-00144feab7de.html#axzz2vrSBYy1e

[jollyreaper2112]

1. easy

Can someone explain to me why shorting like this is legal?


Because it makes certain scumfucks a shit-ton of money. That's why it's legal. It's not right, but that has little to do with the law these days. Just like letting congresscritters inside trade. If the king does it, it's legal.

[yurbud]

2. it shouldn't be is because it's infinitely easier to break something than to make something

[Nye Bevan]

7. So are there are a lot of examples of this kind of thing happening with other companies? (nt)

[Hassin Bin Sober]

11. Where have you been?

[pansypoo53219]

3. how is wall street NOT a casino?

[jollyreaper2112]

4. I know

You get better shows at the casino.

[yurbud]

6. and the gamblers mostly have the courtesy not to act morally superior

[Oilwellian]

5. Jim Kramer explained the game quite well

[LeftyMom]

8. I'm not sure how this is being framed so that the scam artists running the pyramid scheme selling

patent medicines to dupes are the victims.

[Samantha]

9. Wow, this is very misleading

"ZARROLI: Well, that's - Herbalife is sort of like - it's a company like, you know, like Avon or Amway. It has distributors. It has more than three million of them. And they essentially - these distributors buy the company's products and then they try to sell it to other people, usually people they know, but then they also try to recruit other people that they know into becoming distributors."

Not all distributors buy the company's products and then try to sell them .... I am one part-time so I am familiar with the operations. When a person becomes a distributor, that person is running his or her own business. That person makes the decisions as to how to run his or her business. True, there are several options. One of these options to is stock up on inventory from the beginning. The advantage to doing so is that depending on how much inventory one buys, the purchase can lead to a larger discount price. Once the product is sold, since the wholesale price was less, the margin of profit on the item is a little bit more.

However, there is no pressure to go this route. One can print business cards and market the products through his or her website. Or one can purchase the brochures and sell the products that way. If that is the avenue chosen, as opposed to stocking inventory, it is a pay-as-you-go process with no risk involved. The former method, stocking up on inventory, does involve risk because if one does this at the start of a business without a customer base established, if he or she bombs as a promoter or sales person, oops, what does one do?

But the point is, no one at Herbalife ever told me, as a distributor, how to run my business. I was given all the options, with the pros and cons involved in each, and chose my own method of operation. Buying a huge inventory of products for a business which one has no experience in seemed like a heck of a risk to me, plus I really could not afford to do so. So I gave away some samples, offered up my business card with my online store address for potential customers to peruse, and I purchased the brochures and gave them away. Additionally, since Herbalife has been in business since 1980, it does have an established name with a core group of people. I advertised and people contacted me since they had previously used the products and wanted to do so again.

Lost in all of this is the fact that Herbalife makes wonderful products. That is exactly why after looking at a number of work at home businesses, I chose to associate with them. Their products are made from all natural ingredients, they are delicious and they really work.

I love their products, love the success I have had in helping people lose weight with products that taste delicious and work well, and the flexibility I have to choose my own work hours. And despite what is reported in the above article, some people never recruit others to join (I did not) and many distributors are licensed simply because they love the products and want the ability to order them for themselves.

I do not think this article paints a fair picture, so I am throwing in my comments with the thought that there are many, many people who love selling Herbalife products whose comments I never see published in this controversy. The only people whose comments are published are those who made the decision to invest heavily in the beginning, was inexperienced in the business, and failed to meet their goals of being an instant success in an arena that takes time to develop. They took a gamble they would succeed but they did not and lost money.

And that is what I sincerely hope happens to Ackman (who seems quite desperate at this point). And I believe it is disingenuous for him to publicly say if he succeeds in taking Herbalife's stock to zero and makes a billion dollars, he will donate his his personal profits to charity. If he were successful, I believe the profits would be realized by Pershing Square, the company with which he is affiliated, not to him personally. It defies logic to think that a hedge fund manager would work for years to take down a company, undertaking a lot of expense in that process, and when successful will donate the profits to charity. Right, because that is why hedge fund managers typically do, work for years to make a profit which they then donate to charity.

Sam

[taught_me_patience]

10. Herbalife appears to be a pyramid scheme

that relies on recruitment of new distributors that purchase product for self-consumption rather than retail sales to outside parties. This is the crucial test for a pyramid scheme. Read Ackman's presentations on why he believes Herbalife is a pyramid scheme.

[yurbud]

12. I did. I don't care if the company lives or dies. My points were that it takes a Wall Street

sociopath to get the government to do it's job AND that he could intentionally ruin a company and make money from it.

It would be as if the government didn't require warning labels on cigarettes until a company selling stop smoking treatments demanded it.

[Samantha]

14. Ackman could have just as easily gone after Avon or any number of other companies

The difference was that some of the others were floundering in this recession and Herbalife was bringing in 4 billion annually. That is why he went after Herbalife.

Sam

[yurbud]

15. kill something that isn't dying a natural death.

[Samantha]

13. That is not quite true, and I did read his presentation

Herbalife products are not sold in stores. In order to acquire them, a customer has to go through a distributor. Some people become distributors because they cannot find one, and they want to order the products for themselves. The company has reported publicly they have a number of people like this, longstanding customers who become distributors. A distributor receives a nice discount from the retail price. And these distributors do not recruit people to be on their team. Others who do sell the product on a retail basis sometimes decide to go it alone. I was one of them.

Sam

[pa28]

16. I heard the NPR piece as well and here is what I found really disturbing.

Shorting a stock and bashing the company is nothing new but he appears to have successfully used his own influence in government to initiate an investigation. So, you have to ask exactly whose interests are being served here and why.

He had information on the pending investigation from Congresswoman Sanchez' office before it was made public. That's the whiff of corruption.

[yurbud]

17. I missed the bit about Sanchez--not surprising from a corporate Dem though