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I run two investment accounts for personal and family money. I take large positions that are generally comprised entirely of concentrated directional options positions. The Volatility in my portfolios is tremendous and is suitable only for the most speculative part of most peoples portfolios. My... More
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  • Herbalife's Gross Margin: “Coincidence” Or Too Good To Be True?

    This is a quick response to Quoth the Raven's article today entitled:

    Herbalife's Gross Margin: "Coincidence" Or Too Good To Be True?

    You can (and should) read same here:

    quoththeravensa.wordpress.com/2015/01/28/herbalifes-gross-margin-coincidence-or-too-good-to-be-true/

    In response to Quoth's question, there exist well established indicators for Financial Statement Fraud, some of which include:

    • Rapid increase in sales or unusually high profit compared to other companies in the same industry
    • Significant transactions with related parties, that took place outside the usual business
    • Significant, unusual or very complex transactions, especially at the end of an accounting period
    • High turnover with customers whose owners are anonymous
    • Assets and liabilities, revenues or expenses based on estimates which are difficult to support by evidence
    • Company bank accounts, subsidiaries or branch operations in tax havens for unclear economic reasons
    • Unusual changes in the ratio between fixed assets and depreciations

    Source: surveilligence

    The absence of any material variance in (NYSE: HLF) Herbalife's Gross Margin over such an extended period of time is an ENORMOUS RED FLAG.

    Remember what drove Harry Markopolos to investigate Madoff was the consistency of the returns regardless of changes in market conditions, all of which were beyond the control of Madoff. Now consider the multitude of market conditions beyond the control of a company operating in 70+ countries.

    The absence of variance in the Gross Margin speaks to managed results! Plain and simple.

    Tags: HLF
    Jan 28 1:17 PM | Link | Comment!
  • Media Facilitates Herbalife's 14 Day Cover Up

    On November 13, 2014 Reuters reported: "Herbalife board member a target in long running Brazilian fraud case"

    www.reuters.com/article/2014/11/13/us-herbalife-cardoso-idUSKCN0IX2K620141113

    The reporting sets out that (NYSE: HLF) Herbalife Board Member, Distributor and Chairman's Club Member, Mr. Pedro Cardoso was charged by Brazilian Prosecutors with "Money Laundering in 2008 for allegedly participating in an embezzlement scheme a decade earlier that siphoned 26.7 million Brazilian reais ($10.4 Million) from the state government in Espirito Santo"

    In the same reporting, Reuters states: "Cardoso said in a statement dated this week emailed to Reuters by an Herbalife official that the lawsuit was a private matter dating back to 1998 which had no bearing on his work for the company, and that he was unaware he was being sought in the case" and that Cardoso added "I have received no official notification of any kind in regards to this matter".

    Here are some questions for the "Herbalife official" and Herbalife generally (including you Pamela Jones Harbour):

    1. Mr. Cardoso states he was unaware he was being sought in the case. He does not state he was unaware of the case.Hence, where are the disclosures to the SEC in this matter? From what I can discern no notices have been provided from 2009 to the date of this article to the SEC or the public.
    2. Mr. Cardoso stated he has not received "official notification of any kind". Fair enough. How about unofficial notifications.We know for a fact that 12 parties are charged. Is it reasonable to believe that not a single one of those parties reached out to Cardoso and said: "Hey, you are named and charged in this also and they are looking for you". Somewhat hard to believe.

    Let's move on to Reuters:

    Here are some questions:

    1. Who was the "Herbalife official" that provided this email?
    2. Will Reuters publish this email?

    I would certainly like to hear back from Reuters Journalists, SVEA HERBST-BAYLISS, JEFFREY DASTIN AND MARCELO TEIXEIRA on this.

    So, is Pedro Cardoso even important in the Herbalife big picture?

    Some ambitious Herbalife longs have tried to paint this as a non-issue and/or argue Pedro Cardoso is a very small part of Herbalife and not particularly important.

    Herbalife Corporate disagrees. Here is how they describe Cardoso in their 14A filed March 17, 2010:

    Pedro Cardoso , age 43, has been an independent Herbalife distributor for 18 years and a member of the Company's Chairman's Club since 2005. Mr. Cardoso has built a successful organization of Herbalife independent distributors in more than 20 countries. He has been active in training Herbalife distributors around the world, and is a member of various strategy and planning groups for Herbalife. He is also an active volunteer for the Herbalife Family Foundation. Prior to joining Herbalife, Mr. Cardoso served as the Transportation Supervisor of the Avon Company from 1990 to 1992. He received his degree in applied mathematics from the Autonomous University of Lisbon. Mr. Cardoso's qualifications to serve on our Board of Directors include his 18 years of experience as an Herbalife distributor, which brings a first-hand understanding of the function and specific needs of our independent distributors, the ultimate drivers of our business, to the Board.

    Note, this states he is a member of various strategy and planning groups for Herbalife. An NYSE listed company has a Board Member, charged with Money Laundering as a member of strategy and planning groups!

    Imagine for a moment, the press released information that a Board Member of Apple, GM or GE had been charged with Money Laundering. How long would that Board Member's position survive?

    Accordingly, here are some questions for Pamela Jones Harbour (who it now appears is definitively big on talk of ethics and transparency and completely light on action for same):

    1. Why has Herbalife not immediately required Pedro Cardoso resign from the Board?
    2. Why has Herbalife not announced an immediate and thorough review and investigation of all of Pedro Cardoso's activities as a Distributor and his down line to ensure that NYSE listed Herbalife is not a party to money laundering in and throughout Mr. Cardoso's channel?
    3. Why has Herbalife not issued any public press releases on this matter? Herbalife is certainly aware of the charges now?
    4. Why has Herbalife not made any disclosures to the SEC on this matter? Once again, denial of existence is no longer available.

    Now to the Media. CNBC, Bloomberg, Reuters, Financial Times and many others for whatever reason appear to have given Herbalife a pass on this (as well as other matters generally). There exists a desperate need for "follow up Journalism". Printing a headline, throwing it out there and hoping it gains traction and then possibly some resolution is fine. When this does not happen however, we need REAL Journalists to doggedly pursue the Corporation for follow up and beam sunshine onto the matter forcing Corporate action and accountability. When Company's like Herbalife and NuSkin only let friendly Analysts on calls and are fed inane softball questions, Journalism needs to be the voice of Shareholder, the hammer if you will.

    Finally, I move to Mr. Carl Icahn. Perhaps one of the most important figures in this mess and one I hopes exits his position while he can.

    Many are familiar with Mr. Icahn's Shareholders' Square Table.

    It has truly one of the greatest pics ever drawn on Corporations/Boards.

    www.shareholderssquaretable.com/mission-statement/

    It's Mission Statement is as follows:

    The Shareholders' Square Table (NYSEARCA:SST) is a platform from which we can unite and fight for our rights as shareholders and steer towards the goal of real corporate democracy.

    As a member of SST, you'll receive emails with timely information on the movement, and have full access to our website containing:

    • In depth reports about activism and various companies we are involved in
    • Insights on business
    • Commentary and criticism of certain actions by boards and CEOs
    • 'No-brainers' and 'Absurdities'

    Most importantly, our periodic posts will discuss what can be done to change our current, dysfunctional system of corporate governance.
    While there are many good CEOs and boards there are far too many ineffectual ones that are strangling shareholders and the economy.

    For Mr. Icahn my questions would be:

    1. Why have you not required Herbalife to immediate remove Pedro Cardoso from the Board?
    2. How do you square (pun intended) your inaction here with your Mission Statement on Shareholders' Square Table?
    3. Why have you abandoned everything you stand for in as you put it "fighting Corporate tyranny" in exchange for your $600M+ investment in Herbalife? Is your legacy worth this?
    4. If Herbalife won't act to remove Mr. Cardoso immediately (as it apears), file disclosures with SEC, provide a full and accurate press release to the Public/Shareholders and have a full investigation conducted into Mr. Cardoso's activities as a 22 year Distributor with Herbalife, will you call for same publicly?IF NOT, WHY NOT?

    Disclosure: The author is short HLF.

    Tags: HLF
    Nov 28 12:48 PM | Link | 2 Comments
  • Herbalife's Mexican Tax Problem - Part 2

    As i have written previously, I believe Herbalife has a big, big tax problem in Mexico and that this problem is buried so deeply in the 10Q that regular investors have paid same little attention.

    The fact that the "Analysts" have not addressed it in their reports or asked questions about Mexico Tax and also taken at face value Herbalife Corporate's standard line "The Company has not recognized a loss as the Company does not believe a loss is probable", further adds to lack of understanding for common investors as to the actual risk inherent here.

    Consider the following:

    From 2005 to 2013, Herbalife's own reporting indicates Sales Leaders grew from 19,055 to 78,453.

    The Mexican Tax Administration Service ("MTAS") has issued assessments for additional tax only against 2005 and 2006 for $85M USD and, nine months of 2007 for $22M USD.

    Between 2005 and 2008 Herbalife did not break out Mexico separately for Net Sales. However, in 2009 they did and hence were required to restate 2007 and 2008 to disclose what Mexico net sales were in these years. We learn that of the 2007 net sales of 384.6, 370.8 were attributable to Mexico (96.4%) and in 2008 of 375.2, 352.2 were attributable (93.8%). So armed with this info lets assume for 2005 and 2006 net sales were on average 95% of the reported numbers. For 2005 219.9M is 208.9 for Mexico and for 2006, 376.9M is 358.0.

    So on 2005's 208.9M and 2006's 358.0M (total $566.9M) Herbalife was hit with an assessment of $85M, approx. 15%. For the 2007 year, 370.8M attracted a tax assessment for nine months of $22M, annualized $29.3M or approx. 8%.

    Between 2008 and 2013 Herbalife reported $2.44 Billion in Net Sales for Mexico.

    Lets assume for a moment that Herbalife's report that MTAS has cleared it for the 2011 period is correct and extract those net sales. That gives us Net Sales of $2.0 Billion that are subject to MTAS Tax Review and Audit. We know from Herbalife's disclosures that they are already currently reviewing and requesting further info on 2010 and 2012.

    If we take the low tax assessment percentage from above of 8%, Herbalife potentially faces and additional $160M USD in taxes, before interest and inflation adjustments. If we take the high 15% tax assessment number from above we are looking at $301M USD in taxes before interest and inflation adjustments.

    So, we have tax assessments in place and under appeal of $85M + $22M = $107M USD + potential for an additional either $160M or $301M for a grand totals of $267M to $408M USD, before taxes and inflation adjustments.

    Don't you think this is something that the Analysts should have asked about?

    How about a sprinkling of additional liability for PWC in not insisting the Notes in this area were not far more robust and illuminative for predictive value purposes.

    Finally, how could these tax assessments ever be paid and what would that do to quarterly EPS?

    Tags: HLF
    Nov 11 11:29 AM | Link | Comment!
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