Pershing Square Pushes Ahead Despite Clean Herbalife Reaudit

Dec 17 2013 | 2:15pm ET

Pershing Square Capital Management's activist campaign against Herbalife will not be deterred by the clean bill of health given the nutritional supplements company by its new auditor.

PricewaterhouseCoopers said yesterday it had completed its review of Herbalife's books for 2010, 2011 and 2012 and made "no material changes" to the audits conducted by KPMG. KPMG was forced to resign as Herbalife's auditor in April after one of its partners admitted passing confidential information about the company to a friend.

The news sent Herbalife shares to near their one-year high, piling further losses on Pershing Square, which announced a $1 billion short against the company last December. The hedge fund, led by William Ackman, has already suffered some $500 million in paper losses on that bet.

The reaudit is "further validation of the company's financial statements and business model," Herbalife CFO John DeSimone told The Wall Street Journal. "Mr. Ackman's thesis is wrong."

But Ackman is sticking by that thesis: that Herbalife is a pyramid scheme and will be shuttered by federal regulators.

"It is not the role of Herbalife's auditor to determine if the company is a pyramid scheme," Pershing Square said. "Rather, that determination depends on whether distributors earn more from recruiting new distributors than from retail sales to consumers who are not distributors. The few Herbalife distributors that make money earn the vast majority of their profits from recruiting. Herbalife is a pyramid scheme that will be shut down by regulators."

Carl Icahn, an Ackman nemesis who holds a large long position in Herbalife, pronounced himself "very happy" about the reaudit.

"I don't think it was unexpected. It is a good company, it is still undervalued, it's a growth company which gives work to a lot of people and what Ackman says is nonsense."

PwC did find some "errors" in Herbalife's financials, revising down its shareholder equity in two cases and its net income in another.

Unbowed, Ackman reminded Bloomberg News, "Remember, Enron also had audited financial statements."

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