If Herbalife is found to be a pyramid scheme, what would happen to the stock price?

Terriers12's picture
Rank: Monkey | 54

Would it be worth $0 immediately and be delisted, or would it stay at the same price and then be delisted.

Looking at some options strategies

Comments (59)

Dec 28, 2012

According to Bill Ackman, "Herbalife cannot survive in a middle-ground." Meaning, it is binary. It is either a pyramid scheme (which, as he states, is a zero), or it is a respectable, legitimate multi-level marketing company.

Hope this helps.

The difference between successful people and others is largely a habit - a controlled habit of doing every task better, faster and more efficiently.

Dec 28, 2012

It doesn't fit the technical definition of a pyramid scheme because it markets real products (a true pyramid scheme is built only on promises and is illegal).

Dec 28, 2012
inkybinky:

It doesn't fit the technical definition of a pyramid scheme because it markets real products (a true pyramid scheme is built only on promises and is illegal).

That is incorrect. Legally, a pyramid scheme is when a multilevel marketing company distributor makes MORE money RECRUITING than SELLING product. To your point about illegality, pyramid schemes are inherently fraudulent and the repercussions are severe.

Let's just see how it plays out. Will be interesting.

The difference between successful people and others is largely a habit - a controlled habit of doing every task better, faster and more efficiently.

Dec 28, 2012
mhurricane:
inkybinky:

It doesn't fit the technical definition of a pyramid scheme because it markets real products (a true pyramid scheme is built only on promises and is illegal).

That is incorrect. Legally, a pyramid scheme is when a multilevel marketing company distributor makes MORE money RECRUITING than SELLING product. To your point about illegality, pyramid schemes are inherently fraudulent and the repercussions are severe.

Let's just see how it plays out. Will be interesting.

Whenever I see someone defend HLF, I wonder if they themselves are a distributor, or even a cog in another MLM.

Dec 28, 2012

Your question indicates that your general level of knowledge is such that you would be wise to hand over money management to somebody else.

All I care about in life is accumulating bananas

Learn More

Boost your resume and land a finance job by passing the FINRA SIE. 264 pages & 1981 smart flashcards written by a former 8X top Fidelity instructor. Try it for 0 bananas here.

Dec 29, 2012
notamonkey:

Your question indicates that your general level of knowledge is such that you would be wise to hand over money management to somebody else.

Couldn't have said it better. If he's asking questions like these, he's way ahead of himself flirting with options

Dec 29, 2012
gammaovertheta:
notamonkey:

Your question indicates that your general level of knowledge is such that you would be wise to hand over money management to somebody else.

Couldn't have said it better. If he's asking questions like these, he's way ahead of himself flirting with options

+1,000,000

Event-driven strategies of any kind tend to work best when the position is initiated BEFORE the whole world starts looking at it...or unless you have inisght supporting a contrarian view that nobody else has. But I'm guessing you don't.

Dec 28, 2012

Their products are selling pretty well in China...

Dec 28, 2012

inkybinky is an idiot. I love how some people say wrong things with 100% confidence

Dec 29, 2012

I know it's been posted several times on WSO, but if you haven't seen this powerpoint presentation yet, it's worth a skim. Wow, as a takedown this is an absolute work of art.

http://factsaboutherbalife.com/wp-content/uploads/...

Dec 29, 2012

I just wanna see the CEO freak out on CNBC (i think)

Dec 28, 2012
snakeplissken:

I just wanna see the CEO freak out on CNBC (i think)

Get on the analyst call.. 10 Jan I believe.

Dec 29, 2012

Take a directional bet with options.
1. You determine the probability of the stock hitting $0
2. You price your options and determine that the price Maybe you don't have an edge but it's fun speculation.

And I guarantee you that even if people are looking at it, I bet you people are trading HLF without even having seen the webcast.

Dec 30, 2012

My brother was involved with selling Herbalife for a short while. Two minutes into the conversation, after he described to me how it all worked, I told him it was a pyramid scheme and to GTFO. Fortunately, he listened, but after 6 months into it.

Dec 28, 2012
sofib09:

My brother was involved with selling Herbalife for a short while. Two minutes into the conversation, after he described to me how it all worked, I told him it was a pyramid scheme and to GTFO. Fortunately, he listened, but after 6 months into it.

So are Amway and Mary Kay. It doesn't mean that it's legally a pyramid scheme. These companies escape that classification by having real products (regardless of quality or usefulness) that they sell and by structuring their "opportunities" in a way that doesn't *require* large inventory purchases. It's encouraged, of course, but not required.

    • 1
Dec 30, 2012

http://kiddynamitesworld.com/why-bill-ackman-is-wr...

Interesting reply to Ackman. It seems to me that the FTC's statements suggest Herbalife isn't a pyramid scheme, or at least are sufficiently ambiguous that Herbalife could probably make their case successfully.

Jan 2, 2013

Ackman is screwing up royally. I worked with a competitor to herbalife 15 years ago and their only weakness is another compay's superior product line. Multilevel marketing is not for everyone (hey, I failed) but it's not a ponzi.

If his positions go south, and I'm pretty sure they will, he's going to get sued into next century. On top of that, he's going to look like a crook who tried to artificially and fraudulently tried to push shareholder value down to smash and grab on a put position. Credibility killer

This, like the London whale fiasco, could cause blowback to the entire industry. Let's hope this blows over quietly, for all our sake. I have a bad feeling about this one though, I see Acknam clearly abusing public trust (or being very stupid) and this can't end well.

Dec 29, 2012
UFOinsider:

Ackman is screwing up royally. I worked with a competitor to herbalife 15 years ago and their only weakness is another compay's superior product line. Multilevel marketing is not for everyone (hey, I failed) but it's not a ponzi.

If his positions go south, and I'm pretty sure they will, he's going to get sued into next century. On top of that, he's going to look like a crook who tried to artificially and fraudulently tried to push shareholder value down to smash and grab on a put position. Credibility killer

This, like the London whale fiasco, could cause blowback to the entire industry. Let's hope this blows over quietly, for all our sake. I have a bad feeling about this one though, I see Acknam clearly abusing public trust (or being very stupid) and this can't end well.

Count me in the Ackman-is-overrated camp, but it doesn't sound like you read the presentation or understand his argument.

Jan 2, 2013
mrb87:
UFOinsider:

Ackman is screwing up royally. I worked with a competitor to herbalife 15 years ago and their only weakness is another compay's superior product line. Multilevel marketing is not for everyone (hey, I failed) but it's not a ponzi.

If his positions go south, and I'm pretty sure they will, he's going to get sued into next century. On top of that, he's going to look like a crook who tried to artificially and fraudulently tried to push shareholder value down to smash and grab on a put position. Credibility killer

This, like the London whale fiasco, could cause blowback to the entire industry. Let's hope this blows over quietly, for all our sake. I have a bad feeling about this one though, I see Acknam clearly abusing public trust (or being very stupid) and this can't end well.

Count me in the Ackman-is-overrated camp, but it doesn't sound like you read the presentation or understand his argument.

On the contrary. He's taking a bet that the company will crash and then putting forth an incorrect ascertation, either deliberately or ignorantly. The fact is, if this goes to a federal inquiry, he's going to look like an asshole, and the crooks in Washington will get yet another excuse to get all in our business.

So I hope he hedges his bet and shuts his mouth.

....and this coming from a guy who stuck up for Jamie Dimon (and still does).

And if I'm wrong, well, my bad?

Learn More

Boost your resume and land a finance job by passing the FINRA SIE. 264 pages & 1981 smart flashcards written by a former 8X top Fidelity instructor. Try it for 0 bananas here.

Jan 2, 2013

And yeah there are spelling errors, I'm drinking on a charter plane to snowboarding. Ficking sue me.

    • 1
Jan 2, 2013

If you think the stock is going down a lot, but don't want to risk too much, then you could try a variation of this.

The 1 year 30 strike put is about 8. The two year 30 strike put is about 10. You can buy 1.25 one year puts for every 1 two year puts you sell without a cash outlay (you do need collateral though). If the stock goes down a lot, the time value approaches zero for both options and they'll trade for close to intrinsic, so you'll make money (if it's trading at $5/share, the intrinsic will be 25 so you're long 1.25 notional *25/share less 1 notional *25/share that you're short). If the stock goes up, the puts will both lose value...the 1 year will expire worthless the 2 year will still be worth something, so you lose, but it's not a disaster. Worst case scenario, the stock stays flat. If that is true, most likely vols will have come down substantially and the 1 year put in 1 year isn't worth as much as it is today, so you don't lose too badly. Even if you want to just trade the options before expiration, the shorter dated options with 1.25 notional exposure will have higher gamma than the longer dated 1-notional position. If the stock moves a lot, that's good for you. You could do a variation of this with different strikes as well.

Of course, this all assumes that something significant will resolve itself within one year or the stock moves enough for you to exit the options positions before the first expiration. If this isn't all crystal clear, you may just want to sit this one out.

Dec 29, 2012
SirTradesaLot:

Of course, this all assumes that something significant will resolve itself within one year or the stock moves enough for you to exit the options positions before the first expiration. If this isn't all crystal clear, you may just want to sit this one out.

This will take at least 2-3 years unless someone gives up the goods or cries uncle.

Jan 2, 2013
mrb87:
SirTradesaLot:

Of course, this all assumes that something significant will resolve itself within one year or the stock moves enough for you to exit the options positions before the first expiration. If this isn't all crystal clear, you may just want to sit this one out.

This will take at least 2-3 years unless someone gives up the goods or cries uncle.

Maybe so, but the stock could drop 10/share in the interim and you could make money with these options anyway. I'm sure the borrow to short is brutal now.

Jan 3, 2013

I'm with UFO on this one. My parents have been active with one of HLF's competitors for more than two decades now and though I have not followed in their footsteps, I know the structure inside and out. They have presence in two countries and have NOT continued to build the business in one of them after they moved. People in their group, under them so to speak, have now surpassed them and are earning much more then my parents EVEN THOUGH they were "recruited" below. I haven't seen a single person here yet properly define what a pyramid scheme is in the context of MLM, but that's not surprising given that everyone knows someone who went in with dreams of Bentley's, McMansions and tropical vacation only to realize it does not work that way and then proceeded to call anything that even smells of a MLM business as a pyramid scheme, cult, scam, etc. It's definitely not for everyone though.

Not sure who did Ackman's presentation, but there are too many false accusations and more importantly, misunderstandings of the business model, for this to drive the stock price near zero, let alone have HLF delisted UNLESS the FTC drastically changes its definitions or something unexpected comes to light. Something tells me Ackman has already, or is in the process of, booked profits.

The one disclaimer I have to touch on, however, is that MOST of these businesses are fairly sleazy with poor support systems and a lack of structure, not to mention shitty services or products. My experience relates to what I have been exposed to through my parents. The people that work with them would put most people to shame when it comes to networking, communication and interpersonal skills. They exhibit some of the best leadership skills I have seen. Your level of success significantly correlates to who you choose to work with, because those people serve as your mentors. I'm not defending ALL MLM models, because quite frankly majority of them have not been able to replicate the one my parents are with and thus make it exponentially harder for people to succeed in, but HLF has been around for 32 years for a reason and they aren't even near being the oldest or most successful MLM business out there.

" A recession is when other people lose their job, a depression is when you lose your job. "

Dec 29, 2012
The.RealDeal:

I'm with UFO on this one. My parents have been active with one of HLF's competitors for more than two decades now and though I have not followed in their footsteps, I know the structure inside and out. They have presence in two countries and have NOT continued to build the business in one of them after they moved. People in their group, under them so to speak, have now surpassed them and are earning much more then my parents EVEN THOUGH they were "recruited" below. I haven't seen a single person here yet properly define what a pyramid scheme is in the context of MLM, but that's not surprising given that everyone knows someone who went in with dreams of Bentley's, McMansions and tropical vacation only to realize it does not work that way and then proceeded to call anything that even smells of a MLM business as a pyramid scheme, cult, scam, etc. It's definitely not for everyone though.

Not sure who did Ackman's presentation, but there are too many false accusations and more importantly, misunderstandings of the business model, for this to drive the stock price near zero, let alone have HLF delisted UNLESS the FTC drastically changes its definitions or something unexpected comes to light. Something tells me Ackman has already, or is in the process of, booked profits.

The one disclaimer I have to touch on, however, is that MOST of these businesses are fairly sleazy with poor support systems and a lack of structure, not to mention shitty services or products. My experience relates to what I have been exposed to through my parents. The people that work with them would put most people to shame when it comes to networking, communication and interpersonal skills. They exhibit some of the best leadership skills I have seen. Your level of success significantly correlates to who you choose to work with, because those people serve as your mentors. I'm not defending ALL MLM models, because quite frankly majority of them have not been able to replicate the one my parents are with and thus make it exponentially harder for people to succeed in, but HLF has been around for 32 years for a reason and they aren't even near being the oldest or most successful MLM business out there.

Again, your comments are about MLM in general and not HLF in particular. Ackman was not shorting MLM in general, he had very specific accusations about HLF.

Jan 3, 2013
mrb87:

Again, your comments are about MLM in general and not HLF in particular. Ackman was not shorting MLM in general, he had very specific accusations about HLF.

I know that, and I think it's safe to say at least some of those accusation are based on Pershing's understanding of the MLM business model, which HLF participates in. If you can agree with that, then one would assume that a misunderstanding of how a pyramid scheme operates would render some of those accusations false. Correct me if I'm wrong,but Ackman is betting on FTC declaring HLF an illegal scheme. HLF has been publicly traded since late 2004 and in business for over 3 decades, but forget about their track record and try to actually understand how their compensation plan works. Ackman raises some good points, but if HLF goes down it will not be due to FTC's current definition. By the way, his understanding of what a pyramid scheme is laughable, me thinks he should have studied past court cases and FTC investigations of other MLM companies, especially in the 70's and 80's (including the landmark FTC vs MLM case in those years) in order to better asses the viability of his thesis.

Robert Chapman of Chapman Capital brought up an interesting point by saying that Ackman went public with his attack after realizing the FTC will not take any action against HLF and needed the negativity to crater the stock.Either way, this negatively affects ALL MLM companies because unlike in Hollywood,any publicity is not good publicity for this type of business model these days, especially in the short term.

" A recession is when other people lose their job, a depression is when you lose your job. "

Dec 29, 2012
The.RealDeal:

Either way, this negatively affects ALL MLM companies because unlike in Hollywood,any publicity is not good publicity for this type of business model these days, especially in the short term.

Okay, so you're just defending HLF because you're worried mommy and daddy's "business" will crater. That's fine then, I get it. (Seriously, not mocking.)

Jan 3, 2013

Huh? I'm not defending anything. I was just saying part of Ackman's thesis is based on wishful thinking, that's all. HLF will be fine in the long-term, even if they might run a business based on unethical behavior, barring something unexpected coming to light a la Enron or FTC having their hand forced to change the definition of a pyramid scheme. I could care less what happens here, but this whole hoopla provides good volatility for traders.

" A recession is when other people lose their job, a depression is when you lose your job. "

Dec 29, 2012

As much as I agree with Sandhurst, I thought the amount of confidence behind Ackman's tone of voice made it seem like he expected this to hit $0. The whole long-term viability of the business seems to be second rate to actually having this declared a pyramid scheme. For those of you guys who are questioning Ackman's definition of pyramid scheme and analysis of precedents, I encourage you to read that kiddynamite link earlier and scroll down to the comments. The declaration of a pyramid scheme is not as simple as "if revenue from recruiting > sales of product, then pyramid scheme." I think having a former partner in litigation from White & Case be your general counsel ensures that you're not going to fuck up your opinion on what constitutes a pyramid scheme.

Dec 28, 2012
HarvardOrBust:

As much as I agree with Sandhurst, I thought the amount of confidence behind Ackman's tone of voice made it seem like he expected this to hit $0. The whole long-term viability of the business seems to be second rate to actually having this declared a pyramid scheme. For those of you guys who are questioning Ackman's definition of pyramid scheme and analysis of precedents, I encourage you to read that kiddynamite link earlier and scroll down to the comments. The declaration of a pyramid scheme is not as simple as "if revenue from recruiting > sales of product, then pyramid scheme." I think having a former partner in litigation from White & Case be your general counsel ensures that you're not going to fuck up your opinion on what constitutes a pyramid scheme.

With respect to the caliber of his legal analysis/counsel, Ackman might not be interested in ensuring that he is correct so much as ensuring that he has a credible/viable enough interpretation/opinion that, in the event that courts decide otherwise, he won't look like an idiot.

Jan 5, 2013
Comment
Jan 6, 2013
Comment