March Madness For Herbalife

| About: Herbalife Ltd. (HLF)

This will likely be the last time I update readers on the Herbalife (NYSE:HLF) situation until after March 11th.

Bill Ackman, who in a cool, calm and collected fashion tirelessly continues his thesis that the company is fundamentally a pyramid scheme, is said to be offering up proof that Herbalife is running a pyramid scheme in China in the coming week.

Ackman's Pershing Square stated last week that they're going to be holding a conference call on March 11th to detail Herbalife's Chinese operation. Pershing Square said it would be "providing evidence that the company is operating in violation of Chinese law. The report will show that Herbalife's business in China operates much like the company's business in the rest of the world - as a pyramid scheme."

Herbalife doesn't have an enormous amount of business in China, as it accounts for roughly 11% of the company's total sales. However, other MLM companies like Nu Skin (NYSE:NUS) which have significant footprints in the country are likely to also be on watch. Nu Skin had recently suspended all business and promotional meetings in China after a Chinese newspaper put it under scrutiny for its sales practices and recruiting tactics.

If China were to fall off for Herbalife, it'd be one more country to cross off the list of places they can recruit. At some point in the "downline", there's just not enough people out there to recruit. However, random Tweets like these continue to assure me that there's plenty of distributors here in the U.S. still scrapping for recruits/business:

This comes after other news last week, where the FTC responded to an inquiry from Senator Markey regarding Herbalife's business model. The FTC claims to be "carefully considering" the Senator's concerns. The SEC, who Markey also sought out for action, has yet to respond to the Senator, as CNBC's Herb Greenberg pointed out as recent as yesterday:

NY Post's Michelle Celarier, who has been prolific covering the Herbalife saga, published an article this morning highlighting Ackman's success in 2014 thus far, overshadowing the mark-to-market losses he's taken on Herbalife, despite making a profit in 2013. She attributes his success to several investments, which she highlights in depth in her article:

So far, 2014 has been very, very good to Bill Ackman.

The hedge-fund mogul's Pershing Square International is up 11.7 percent this year, according to an investor, powered by a 7.4 percent gain in February.

The gain far surpasses the break-even first two months of the year for the S&P 500 index.

Last year, the now-$13 billion Pershing Square, punished by its positions in Herbalife and JCPenney, rose 10 percent, but still lagged the more-than-29 percent rise in the S&P.

Ackman's double-digit gain this year puts his performance way ahead of similarly sized funds, according to HSBC's ranking of hedge funds.

Carl Icahn, Ackman's nemesis, recently upped his stake in Herbalife to 17 million shares.

So, March is looking like it's going to be a crucial month for Herbalife. It will certainly be interesting to see what Ackman's angle is on Herbalife in China - Bill generally has provided mountains of evidence when he presents against the company.

A lot of the risk in being short Herbalife is in the argument that if the government intervenes and reprimands or shuts down the company:

1. There will be people that lose jobs in the short-term, but it will prevent other people from losing money in the long-term.

2. It will set enormous precedents for all MLM companies, who have been operating successfully for years.

There's no doubt MLM reform is needed and likely coming at some point - but will Herbalife be the first domino to fall?

The question is going to be whether or not Ackman can continue on and get the government to pay serious attention. The fundamentals are the easy part - you can clearly see the company is operating as a pyramid.

The SEC's silence? It could mean anything from "they're completely ignoring it" to "they're investigating and can't comment" - who knows? What I do know is that there's certainly risk in going short Herbalife, but I continue to think that the fundamentals of the company's business are ultimately going to drive it's downfall. I remain short Herbalife through puts and firmly bearish on the company's long-term prospects.

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.