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I bought some Herbalife (NYSE:HLF) call options Tuesday. I write this up front so that you won't mistake me for a disinterested observer. And also so you won't misinterpret the rest as advice to buy Herbalife, sell Herbalife, or use its diet pills as suppositories.

In making this disclosure, I've already been infinitely more forthcoming than noted hedge-fund manager and short-seller David Einhorn. Einhorn's surprise cameo on the Herbalife earnings conference call set the stock back 20%, or $543 million in market cap lost for each of his three leading questions.

Einhorn wanted to know about sales outside Herbalife's network of distributors, recruiting incentives for distributors relative to their compensation for selling the product, and the breakdown of distributors based on the scale of their purchases, which Herbalife had recently stopped disclosing but released overnight in response to Einhorn.

All very innocent stuff, discussed politely. And if the questions had been asked by analyst Daisy Echinacea of the Rutabaga and Zucchini broker-dealer, no one would have batted an eyelash.

But this was David Einhorn, who had correctly called out Lehman Brothers as a house of cards a year before its collapse. The same Einhorn who so successfully roasted the accounting of Green Mountain Coffee Roasters (NASDAQ:GMCR) last year. The Einhorn who started his hedge fund with $900,000 (more than half of it from his parents) in 1996, and now runs $5 billion in other people's money after delivering 25% annual returns through 2007.

Sure, it's the same David Einhorn who once sold Apple (NASDAQ:AAPL) at $18, and more recently bought into Best Buy (NYSE:BBY) at $33, but the main point holds: Einhorn is a hugely respected, widely followed hedge-fund whale.

Moreover, his questions appeared designed to stoke recently dormant suspicions that Herbalife, like other multi-level marketers, is really just a pyramid scheme. Like pyramid schemes, multi-level marketers offer recruiting incentives, so that as the nutritional and beauty products flow down the flow chart, the profits swim upstream.

Only these are actual products, not just promises of eventual riches. As Herbalife hurried to point out Tuesday in the wake of Einhorn's ambush, it's been around for 32 years-hardly the hallmark of a pyramid scheme, which tends to exhaust the pool of greater fools rather quickly.

Herbalife's chief financial officer told The Wall Street Journal that "the stock's reaction says more about Wall Street than it does about Herbalife." And it would be hard to disagree.

The few cynics still trading stocks in their personal accounts are mostly convinced that they're playing in a casino rigged by the big boys. Even those who didn't share Einhorn's sudden interest in the Herbalife nitty-gritty might have reasonably interpreted it as the onset of a short attack, and traded accordingly.

If only David Einhorn were as forthcoming to the many investors affected by his questioning as Herbalife executives were to him Tuesday. Alas, he's not making the media rounds as in the past, and a spokesman for his Greenlight Capital has refused to comment on his possible financial interest in Herbalife, if any.

When Einhorn impugned Lehman, he said he was shorting it. When he questioned the value of St. Joe Company (NYSE:JOE) and Green Mountain, he said he was shorting them. But as to Herbalife, he's suddenly shy.

Which brings up a few questions Einhorn might want to answer. That is, if he acknowledges that his celebrity comes with additional responsibility when it comes to asking pointed public questions that could just as easily have been answered privately. Otherwise, he's just another Wall Street sociopath and manipulator.

So, Mr. Einhorn:

  • Are you, in fact, short Herbalife, and whether you are or not, why are you playing coy after volunteering your positions so readily in the past?
  • When you decided to ask your questions on the public conference call rather than privately, were you not aware of the likely fallout for the stock?
  • When might you enlighten us as to the point of your very public fishing expedition?
  • Might you be, as some have suggested, using your reputation as market leverage?

These are, like the interrogatories you posed to Herbalife, merely questions, not aspersions. People who falsely accuse legitimate companies of being pyramid schemes to profit from subsequent share price moves can go to jail, after all.

Herbalife answered Einhorn's questions courteously and promptly. Here's hoping he does the same with the legitimate public questions about his own interest in the matter.

Disclosure: I'm long five Herbalife $50 call options expiring May 18, purchased at $7.50. I may sell them at any time.

Source: 4 Questions For David Einhorn