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Summary

  • Herbalife's stock rocketed yesterday, as the company continues to put a bid under its own share price; every day making it more and more enticing for Mr. Icahn to sell.
  • ABC News recently exposed distributors lying about the health effects of Herbalife's products to potential recruits.
  • The company's response was to implement a re-training program that seems to have already been implemented in the first place.
  • We continue to see smoke and mirrors from Herbalife, as we've gotten everything but progress towards a retail sales tracking system - which could hold the key for exoneration.
  • Longs arguments that Herbalife is separate from distributors that lie is superseded by the fact that Herbalife rewards these people, like John Tartol, with board seats and compensation.

A buyback-fueled Herbalife (NYSE:HLF) rocketed through resistance yesterday, breaking the elusive $60 mark with ease, and closing the day roughly 3.5% higher at $61.88.

Hey, if you're going to loot the company of all of its equity, you better be able to make a statement with it!

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Unfortunately for Herbalife, the stock price is meaningless to the FTC, SEC, FBI, DOJ, and two attorney generals probing the company for misleading business practices and running an endless chain recruiting scheme.

Thus, as Herbalife continues to bid its own stock price up, I'll continue to purchase puts accordingly.

If not anything else, this could be setting up for a poetic justice style situation, wherein the biggest bagholder in the Herbalife deal could be Herbalife. This would be even funnier, if the looting of equity from the company didn't take away any equity available to make victims whole, should the regulators step in and shut the company down.

You may have seen the ABC News piece on Herbalife where distributors, eager to sign people up for their downline, claimed that Herbalife has helped cure brain tumors and even help get a 40-something woman pregnant. If you haven't seen the full investigative report, you can watch that video here. If you're not appalled by what is necessary to move Herbalife's product and business opportunity onto others, I don't know what to tell you.

As a response to the recent ABC News piece on Herbalife, the company has come out and claimed that it has started a re-training initiative.

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ABC News reported:

The nutrition and diet shake company Herbalife has undertaken a "significant re-training initiative" in response to incidents captured by ABC News undercover cameras in which some of the company's independent distributors were seen making medical claims about the products and boasting about the potential for riches.

"In direct response to the interview where Brian Ross brought to light instances of members making unauthorized product claims, the company began a significant re-training initiative," Herbalife spokeswoman Barb Henderson said in an email Monday.

With every product order, the company is now shipping a guide book that contains detailed examples of what distributors can and cannot say about Herbalife products, Henderson said.

Great headline for Herbalife, right?

Addressing its issues, trying to make "real world" progress, right?

Unfortunately, it may not be all the "progress" that its hyped up to be.

Michelle Jones over at ValueWalk absolutely skewers the company, looking back to 2007 to find examples of where these practices should have already been standard operating procedure for the company:

As ABC News noted in the article, Herbalife Ltd. was already distributing training materials which told members to avoid making medical claims about the products. Those materials state that Herbalife products "are not intended to diagnose, treat, prevent or cure and disease or medical condition, and under no circumstances should there be any statements, advertising or implications to the contrary.

The report seems to suggest that Herbalife Ltd. has also just now established a hotline to take reports of violations regarding claims made by distributors. But the transcript from the company's analyst meeting in November 2007 indicates that the company already had a hotline - or at least did at that time - where people could report false or misleading claims made by distributors. Herbalife CEO Michael Johnson talked about the hotline at that meeting.

The third item on the list was something the Herbalife Ltd. spokesperson said they were thinking about doing. So if they do move forward with that initiative, it would be new or significant - if they follow through and do something about the distributors who make false claims about their products.

So if Herbalife Ltd. was already doing two of the three things and is only considering the third one, then does this "re-training" currently involve anything "significant"?

That answer, of course, seems like a big fat "no".

Longs and fans of the company continue to promote this re-training and the stock price movement yesterday as signs that the company is heading in the right direction. For me, it seems just the opposite - signs that the company is running out of ideas.

So, what it looks like to me is that the two most recent "positive" developments for Herbalife - the stock price moving up and the "re-training initiative", are both falsehoods.

Additionally, longs have spoken out over the last few days about Bill Ackman's recent documentary. Longs and Herbalife supporters have been claiming that because the people scammed on the documentary were scammed by a distributor, and not by Herbalife corporate, that the company isn't liable. While that's a lovely afterthought style argument, it doesn't hold water for two reasons:

1. Up until just recently, all lead generation businesses and distributors were required to register with Herbalife.

2. Herbalife already backhandedly acknowledges that this is going on. Again, for the millionth time, John Tartol sits on Herbalife's Board of Directors. This is a man promising that "anyone" can make $10,000/month being an Herbalife distributor.

Talk about a breach of fiduciary duty - jeez.

In addition to this, one of the many subplots of the Herbalife saga, surrounding the bloggers and supporters of both sides of the coin looks to take an interesting twist at some point in the near future, according to blogger TheSkeptic21. The link to his blog there is worth a read if you're interested in what's on deck behind the scenes in the war over Herbalife.

While we're covering subplots of the situation, Mr. Icahn and Mr. Ackman have recently made amends. With this - and knowing what kind of guy Mr. Ackman is - I guarantee you Mr. Ackman is chomping at the bit to get Mr. Icahn to listen to him about Herbalife. With Mr. Icahn finally opening up an unbiased ear to Mr. Ackman, could it be possible that Mr. Icahn could show some humbleness and acknowledge the truth about the company he's gotten himself involved in? Would it not be the ultimate Hollywood twist if Mr. Icahn not just sold off, but went short the company with Mr. Ackman?

Many think that's a stretch. Knowing how Mr. Ackman operates, via reading Confidence Game many times over, I think it's likely that he's focused on making Uncle Carl "see the light".

Regardless, it's never been clearer to me that Herbalife is a global confidence game that unfairly dupes people from their money under the guise of a business opportunity. As the days go by, the case becomes clearer and clearer. Herbalife's actions show that it's backed into a corner and the regulators looking at the company are going to be forced to act on critical conclusions sooner, rather than later. Herbalife, as we know it now, will likely no longer operate when the regulators do draw their conclusion. I remain short Herbalife through puts and long-term bearish on the company's 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.

Source: Herbalife Does Nothing, Calls It Progress