It's my belief that Friday's stock move in Herbalife (NYSE:NYSE:HLF) was nothing more than the financial media not being able to accurately parse out what's going on with the company, but for the nice job the "Halftime Report" panel did in debunking Tim Ramey's overly optimistic misinformed hubris, which we will touch on at length.
I believe a fundamental misunderstanding of where the facts sit currently is the main cause for this run up. And while the market may be right - certainly there are some good options on the table, according to the company - I think there is an unnoticed case for the stock being decimated that many buying on Friday may not even be able to imagine.
After performing research throughout most of the weekend so far, I have come to realize that there are five very dangerous myths that have come to dominate the narrative surrounding the company right now. These myths have given the market the misunderstanding that the company is definitely in settlement talks with the FTC, and that there is no further risk inherent aside from that.
In an effort to inform investors, I want to lay out the actual facts by debunking these myths directly so that all investors have some clarity as to what the state of the company's negotiations or "discussions" with the FTC are - and then some.
Myth #1 - Herbalife is Definitely in Settlement Talks with the FTC
People spent all day Friday thinking to themselves that the FTC is in settlement talks with Herbalife. The reality of the situation is that the company is actually, according to its own 10-K, "in discussions with the FTC regarding a potential resolution of these matters." A resolution simply means a terminus, sans direction. Nothing more, nothing less.
Settlement talks represent one of three potential outcomes, according to the company.
These outcomes include:
So, there's a chance of a settlement, according to this disclosure and a chance of the outcome being positive for Herbalife. The complaint scenario - well, that's likely not a pretty scenario. What's important is that we do not know definitively that the company is in settlement talks. I know many of you think there's too much analysis to this, but I assure you this statement was worded in this fashion in the company's filing for a reason - and it was read, as boilerplate as it is, on the conference call for a reason.
I think that reason may be so that Herbalife can go to the SEC at some point and say, "we adequately warned our investors." But that's all speculation.
As I stated in my last article, a "contested civil complaint" is not something the FTC files. They file a "civil complaint", and then the company contests it and the parties decide which way to move forward from there. There is a plausible theory that this language was added in the company's 10-K because discussions with the FTC, which have likely been ongoing for years, may not be going as well as originally planned. This is just the opposite of what the market priced into the stock on Friday - and I believe this is extremely important.
Myth #2 - The SEC is No Longer Investigating the Company
The thought that the SEC is no longer investigating the company came from the same prognosticator who told everybody the that FTC case would be settled in summer of 2015. This analyst, Pivotal's Tim Ramey, is now almost 3/4 of a year late in his prediction. And that's not all Mr. Ramey has been wrong about over the course of this investigation (not to mention with other MLM companies like Nu Skin (NUS)). That's another article in and of itself.
Mr. Ramey determined that the SEC case was closed because the SEC ended its correspondence with the company in comment letters and FOIA information he interpreted led him to this conclusion.
ValueWalk wrote about Ramey's analysis:
Ramey submitted two requests to the SEC under the Freedom of Information Act requesting information on "documents related to any SEC investigations" of Herbalife between July 1, 2014 and June 30, 2015. In both cases, the SEC sent letters back stating that there was "no information" on any investigations involving Herbalife. The analyst suggests that this could mean the reported probe was closed at some point before July 1, 2014.
Herbalife released a number of documents today showing that the SEC had finished reviewing its filings. The letter stated, "We have completed our review of your filings."
In all there were six letters, according to Ramey, pertaining to the company's language and disclosures in its 2013 and 2014 10-K filings. He (apparently) thinks all will be smooth sailing for Herbalife from here on out.
The analyst wrote, "The closure letter on May 27th makes it clear that the SEC is satisfied with its review of the 2013 and 2014 documents."
His FOIA conclusions were promptly dismantled by a FOIA expert who runs a company based on analyzing FOIA requests for public companies.
Ending a comment letter chain is extremely different from closing a probe into the company or letting a company know that they are going to go forward without enforcement proceedings. Many companies that are in the same spot as Herbalife wind up putting in their disclosure that the SEC has decided they will not take enforcement action.
This has not happened in Herbalife's case, the company has made no such disclosure, and the notion that the SEC is no longer investigating the company is unfounded and based on information that I believe to be irrelevant.
Myth #3 - Injunctions Halting the Business and an Asset Freeze are Off the Table
In an interview with CNBC's Scott Wapner on Friday where Wapner tried to correct Ramey, Mr. Ramey came out and made the statement that:
"What you don't see there as an option is the FTC is going to take injunctive relief and close this down, and I don't think if that was the FTC's strategy they'd be negotiating with Herbalife right now..."
"I don't think you negotiate a settlement and a fine if you're still thinking, 'Well, maybe we should shut them down'..."
That's Mr. Ramey's mistake. There is no proof at all that the company is "negotiating a settlement". It simply remains an option - one of three options - that the company has disclosed. And then the company even states they have no way of predicting which of these three outcomes will occur. There is no proof - but for Mr. Ramey knowing something the public doesn't - that the company is in settlement talks. "Discussions about a resolution" is a far different disclosure than "negotiating a settlement".
I have consulted several attorneys with regard to this statement on both the bull and the bear case and the decision is unanimous: a temporary or permanent injunction is not off the table and could easily be part and parcel with any complaint - contested or otherwise - that the FTC winds up filing.
An injunction to freeze assets or halt the business is not off the table yet. Case closed.
Myth #4 - The DOJ is No Longer Investigating the Company
Several weeks ago, the Wall Street Journal published an article, citing sources close to the matter, that stated a Department of Justice investigation into both Herbalife and Ackman had "fizzled" to a stalemate in late 2014.
The article does not state the investigation is closed.
In fact, Herbalife's own disclosure that the Department of Justice sought documents from them came in early 2015, indicating that there has been a connection between the DOJ and the company after the supposed stalemate in 2014.
Why is this relevant? Here's what the WSJ stated in their article:
The investigations could be rekindled if new evidence is unearthed, but for now the probes appear to be headed nowhere, according to the people.
Judging by Herbalife's own disclosure, it appears new evidence may have in fact been unearthed, in early 2015. From the August 2015 10-Q:
The Department of Justice recently sought information from the Company, certain of its Members and others regarding allegations being made about the business practices of the Company and its Members.
The idea that the DOJ has cleared the company of wrongdoing is an absolute fallacy and is completely untrue. Similar to the SEC, if the Department of Justice notifies a company that it is cleared of wrongdoing, the company will then disclose this in their filings and ostensibly make a huge deal out of it. None of this has happened.
Myth #5 - The Company Has Definitely Only Received One Civil Investigative Demand
Through discussions with several legal minds that I am friendly with, it has come to my attention that the words "as supplemented", as added in the company's verbiage when they say:
Pursuant to the CID, as supplemented, the FTC has requested from the Company documents and other information for the time period commencing January 1, 2009 to the present.
Is indicative to several people that the FTC may have added additional demands from their first CID issue to the company at the start of its investigation. While there is no way to tell what this could encompass, it has been speculated by some individuals that this supplement could broaden the scope of the investigation from the United States to outside of the United States.
If true, and again, we have no direct evidence of this, this may tie into the company's recent Foreign Corrupt Practices Act risk factor included in the company's 10-K and written about by QTR in my last article.
I hope this gives investors more clarification on where we actually stand at the present time. It would seem the stock market wants to hand out the narrative that the company is very close to settling with the FTC and all will be finished soon. Don't get me wrong - there is a chance that is taking place as we speak - however, the reality of the situation is that everything is still on the table. Absolutely no scenario, to this point, can be factually ruled out by any of the evidence and disclosures that have been made so far by the company.
And does that situation warrant an almost $1 billion hike of the company's enterprise value, like we saw on Friday? You can be the judge of that.
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Disclosure: I am/we are short HLF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am short HLF with a hedge