Tilson On Herbalife's 'Shocking' Confession

Herbalife Ltd. HLF investors were in for a shock Thursday morning, as the company said it has overstated Active New Members metric for the last two quarters, sending its shares spiraling more than 8 percent.

The company earlier reported that globally, ex-China, active new members grew 16.7 percent in the quarter; however, that number actually rose only 3.2 percent.

In a regulatory filing, the company said, "Database scripting errors led to both (i) the errant inclusion of additional categories of data in calculating the metric for parts of 2015 which were not included in the 2014 and prior period calculations and (ii) quarterly aggregation issues which created variances from period-to-period depending on when the greatest level of activity occurred during the relevant period."

Related Link: Dan Nathan Sees Unusual Options Activity In Herbalife

Cites 'Limited Visibility' Into Metrics

The company said it did not discover these errors earlier because it had limited visibility into the likely rate of change in this metric upon its first use.

Herbalife didn't hint of a restatement of financials saying, "No information regarding this non-financial metric has been included in any of the Company's periodic reports filed with the Securities and Exchange Commission and the errors do not impact the Company's historical consolidated financial statements."

Investor Whitney Tilson responded, "This is terrible news for three reasons: the numbers are much worse, it calls into question the company's internal systems (and perhaps integrity)."

"It highlights that Herbalife is so complicated that not even the company itself can get its arms around it," Tilson added.

At the time of this writing, shares of Herbalife were down $4.49 at $51.89. They have been down 3 percent this year.