Herbalife Continues to Soar As Company Prepares to Answer Pyramid Scheme Accusations

Shares of Herbalife

soared 12 percent on Monday, and tacked on nearly another three percent Wednesday along with broader market indicies. Herbalife suffered a 37 percent drop in 2012 as hedge fund magnate Bill Ackman accused the company of running a pyramid scheme. In May, Einhorn questioned company officials about the Herbalife business model resulting in a loss of 20 percent the next day. In December, Bill Ackman laid out his case against Herbalife, causing shares to fall nearly 29 percent over the month. His 300-slide presentation outlined his reasons for calling Herbalife “the best managed pyramid scheme in the history of the world.” Among Ackman's accusations, 93 percent of all distributors do not make a profit and senior level distributors earn mostly by recruiting other distributors--not by selling Herbalife's nutritional and weight loss products. Ackman plans to donate all profits from his short position in Herbalife to charity after saying that any money he would make from the company would be “blood money.” His stated goal is for federal regulators to investigate and ultimately cause the stock to go to zero. On the last trading day of the year, Herbalife shares rose 12 percent, recovering some of the recent loss. Herbalife has announced an analyst day on January 10 to answer Ackman's allegations. This, along with some analysts suggesting that Herbalife shares are undervalued, might have caused value investors to pour in on Monday. Market watchers believe that short covering also contributed to Monday's move higher. As of the latest report from December 14 and before Ackman's presentation, Herbalife had a nearly 27 percent short interest with that number likely rising as the accusations surfaced. Herbalife's December decline took other stocks with it. Nu Skin Enterprises

has fallen with Herbalife, but saw a nearly five percent rally on Monday, and a further near three percent rally Wednesday.