Did Herbalife Repurchase Shares While In Possession Of Material Non-Public Information?

Feb.20.13 | About: Herbalife Ltd. (HLF)

On January 10, 2013, Herbalife (NYSE:HLF) held a conference for the purpose of rebutting Pershing Square's allegation that Herbalife is a pyramid scheme.

In the January 10th presentation (immediately preceding the Q&A section of the presentation) Amy Greene stated the following:

Before we open for Q & A I just want to make one statement to you all. Herbalife is a company, as I've said before, that strives for transparency and as such we would like to comment on a recent news article. We contacted regulators in connection with the current situation and beyond that we will have no additional comment.

It is noteworthy that Greene omitted the identities of the regulators (note the statement was that Herbalife contacted "regulators" as opposed to a regulator). Also, Green omitted the material fact (as revealed February 19, 2013, when Herbalife filed and published it 10K 2012) that "the SEC's Division of Enforcement…requested information regarding the Company's business and financial operations" until it filed and published its 10K 2012.

On February 19, 2013, Herbalife filed and published its 10-K for year ending December 31, 2012. Item 1A (RISK FACTORS) begins on page 25 and concludes on page 44. Slipped into this section, on page 30, is the following:

From time to time, we receive inquiries from various government authorities requesting information from the Company. Following December 2012 market events and a subsequent meeting we requested with the staff of the SEC's Division of Enforcement, the staff requested information regarding the Company's business and financial operations. Consistent with its policies, the Company is and will fully corporate with these inquiries. (Emphasis added)

From the unknown date that the SEC requested information regarding Herbalife's business and financial operations until Herbalife revealed this material fact in its 10-K 2012 on February 19, 2013, Herbalife was in possession of material non-public information.

On February 19, 2013 Herbalife issued a press release which included its admission that Herbalife "Repurchased 4.0 million shares of stock since December 31, 2012."

If Herbalife repurchased the (or any portion of the) 4 million shares of HLF stock after the SEC "requested information regarding the Company's business and financial operations," Herbalife repurchased such shares while in possession of material non-public information.

It is difficult to imagine an event more material to investors then the SEC opening an inquiry into both Herbalife's business and financial practices. While many have focused on the probabilities of an FTC investigation, we have long stressed that the company's fate may in fact lie in the hands of the SEC.

Herbalife's latest actions will only add fuel to the fire for the SEC. As stated in our first report, Herbalife has repeatedly made significant material misstatements about its business operations, and is operating in violation of a California court order.

We can't predict what will happen as a result of the SEC's request, but we do know that based on our research and the series of missteps made by management, there is a strong possibility that these inquiries could lead to significant consequences for Herbalife.

Disclosure: I am short HLF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.