Canada Probing Herbalife, Eh?

Jan.28.14 | About: Herbalife Ltd. (HLF)

My last article on Herbalife (NYSE:HLF) was quick to point out that sell signs continue to pile up:

  • The stock was clipped last week on news of Senator Markey calling for an inquiry into the company's business model.
  • Media in China continues to scrutinize Herbalife, just weeks after speculation as to whether or not a Herbalife investigation would follow one of Nu Skin (NYSE:NUS)
  • I also noted in my previous article an influx of put buying into Herbalife that took place on January 9th and 10th - 45,000 contracts that represent 4.5 million Herbalife shares that someone is betting against.
  • Dan Loeb confirmed his exit of the company through a formal filing.

Yesterday, the stock bumped upwards on news of renewed interest in a Bill Stiritz LBO of the company. I argued that such an LBO isn't likely, mostly due to the amount of equity capital that would be necessary to raise for a company that's under scrutiny. I also argued that private or public, Herbalife was still a pyramid scheme.

Today, we're offered two more sell signs - one bigger, one smaller.

First, it was announced by the New York Post that Canada has joined the list of those probing Herbalife - that list now reads one U.S. senator, China and Canada. Starting to put that whole Belgian ruling in perspective, huh? The report read:

Canada's top consumer regulator has launched a formal inquiry into pyramid scheme complaints made against Herbalife, The Post has learned.

The inquiry by the Canadian Competition Bureau is tied, in part, to consumer complaints it has received about the controversial Los Angeles-based diet shake seller, sources familiar with the inquiry said.

The Competition Bureau has also interviewed former Herbalife insiders and distributors who believe the company is a pyramid, sources said.

Once a formal inquiry has started, the CCB can apply for "information gathering orders," one source said.

The Competition Bureau, which similar scope as the US Federal Trade Commission - except it can bring criminal charges, declined to comment.

In addition to the news out of Canada, Herbalife's short position is starting to increase a bit more as well - up from 19 million back to 20 million.

These two items, piled on to the news from last week, should be making Herbalife longs a bit weaker in the knees. We'll see this afternoon or tomorrow if the company responds to this news. I, as you may have guessed, continue to contend that an investment in Herbalife remains at a risk for a total loss.

Herbalife is weathering the news so far, off only 3.6% and trading at $61.75 mid day.

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.

Additional disclosure: I am short the equity and hold a long straddle.