Loeb Splits With Ackman On Herbalife As SEC Opens Probe

Jan 10 2013 | 2:08pm ET

Two of the most prominent activist hedge fund managers are going head to head over Herbalife.

Less than a month after Pershing Square Capital Management's William Ackman called the nutritional supplements company a "pyramid scheme," Third Point's Dan Loeb said he had bought more than 8% of Herbalife, betting that its shares could rise as much as 45%. And just as Ackman's pronouncement sent Herbalife shares tumbling, Loeb's sent them higher.

That is, until word came of a Securities and Exchange Commission probe into Herbalife hit the wires. The SEC is reportedly looking into the sales practices at the heart of Ackman's allegations.

In a letter to investors, Loeb laid out his counterargument to those allegations, which he said do not have "merit."

"The short thesis rests on the notion that the FTC has been asleep at the switch, missed a massive fraud for over three decades, and will shortly awaken (at the behest of a hedge fund short seller) to shut down the company," Loeb wrote. "We find this thesis to be preposterous, particularly since the FTC has been sensitive to frauds of this kind."

Loeb also poured scorn on Ackman's "theory that hundreds of thousands of people who have been scammed supposedly are too ashamed to speak up." Loeb's letter never mentions Ackman or Pershing Square by name.

Ackman was restrained in his response to Loeb's move. "To the extent another investor, long or short, brings additional sunlight to the situation, we welcome them," he said.

Other hedge funds are also taking sides: Kynikos Associates is believed to be shorting Herbalife, while Carl Icahn, Chapman Capital and East Side Capital are long investors in the company.

For its part, Herbalife sought to counter Ackman's claims during a meeting with analysts and investors today. The company's president, Des Walsh, called Ackman's presentation last month a "tremendous amount of misinformation."

"Pershing we believe intentionally misrepresented our R&D investments to substantiate their incorrect theory," Richard Goudis, Herbalife's chief operating officer, said.

"Our business model is business-to-business. We sell to distributors," President Des Walsh added. "For those of our distributors who sell to other customers, we have less visibility, but that is no different than Costco. It's simply the nature of our business model."

"We are confident that you will see that we're a legitimate company with legitimate customers," CEO Michael Johnson said.

Ackman wasn't having any of that. Herbalife "distorted, mischaracterized and outright ignored large portions of our presentation," he said in a statement. "For example, Herbalife did not respond to our identification of overstatements and inaccuracies in the company's earnings statement for distributors, which among other deceptions, excludes the 93% of distributors that have zero gross earnings."

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