WASHINGTON — WASHINGTON (AP) — Shares of Herbalife tumbled Thursday following news that activist investor Bill Ackman has reduced his short position against the nutritional supplement maker, while reasserting his argument that the company's business amounts to a pyramid scheme.
THE SPARK: Ackman disclosed the adjustment in an Oct. 2 letter to investors in his Pershing Square Capital Management funds. The billionaire investor noted that the fund's value declined more than 5 percent in the third quarter, in part due to rising shares of Herbalife. Company shares rose from roughly $45 to $70 during the three-month period.
Ackman has alleged since December that Herbalife's business is a pyramid scheme that makes most of its money through recruiting new salespeople rather than on the products they sell. Ackman has taken massive short positions on the company's stock, meaning his fund would make money if the shares decline.
But in light of the recent stock run-up, Ackman said he has reduced his short position by more than 40 percent and replaced it with long-term derivatives.
"The restructuring of the position preserves our opportunity — if the company fails within a reasonable time frame," Ackman told investors.
Despite the adjustment, Ackman reiterated his accusations about Herbalife's "deceptive marketing practices," which he has asked federal and state regulators to investigate.
"While we have endured mark-to-market losses on this investment as Herbalife bulls have promoted the stock and downplayed the probability of government intervention, we believe it is only a matter of time before the company is shut down and prosecuted by regulators," Ackman stated.
The letter was posted to an investor website Thursday. A spokeswoman for Pershing Square Capital Management L.P. confirmed the authenticity of the letter, which was distributed to its investors.
THE BIG PICTURE: Los Angeles-based Herbalife sells energy drinks and stress management pills and recruits people to work as independent sales representatives. On its website, it promises to "change people's lives" either by the chance to sell Herbalife products, or the chance to take them.
Herbalife's business has become a point of contention between several prominent Wall Street figures. Ackman has publicly attacked Herbalife, saying it distorts the financial information it gives to investors. Rival investor Carl Icahn has vehemently disagreed and has increased his stake in the company. In February, the feud boiled over into the public arena as Ackman and Icahn got in a shouting match on live television.
Herbalife has gone on the defensive against Ackman, disputing his characterization of the company and saying that Ackman wants to push the stock down for his own benefit.
SHARE ACTION: Herbalife Ltd. shares fell $4.77, or 6.5 percent, to $68.21 in afternoon trading.