Monday, October 19, 2015


Whitney Tilson: I hold in my hand the envelopes. As a child of four can plainly see, these envelopes have been hermetically sealed. They've been kept in a #2 mayonnaise jar on Funk and Wagnalls' back porch since noon today. No one knows the contents of these envelopes, but you Carnackman, in your borderline divine and mystical way, will ascertain the answers having never before seen the questions.

Carnackman: "Wells notice."
[Carnackman's face goes grey. He lays the unopened envelope on the desk.]
Carnackman: "Did I mention I had really good stuff on Herbalife I can't talk about?"

Ben Walsh published a story last Friday about some suspiciously timed trades that just so happened to occur on the eve of the NY Post (I know right?) publishing a negative article about Herbalife CEO Michael Johnson. The article was titled Video reveals Herbalife boss saw ‘pyramiding’ signs early on. and attempted to paint the CEO in a criminal light.

About a month ago, Roger Parloff published a well-researched article in Fortune titled The Siege of Herbalife.  In his article Parloff discusses that video.  Parloff's take seems to indicate that 2005 video was a record of Johnson actively reshaping the way Herbalife would recruit distributors and members. He chastised certain lead generation systems and embraced changes that were designed to reduce the turnover in distributors actively pursuing their involvement as a "business opportunity." Johnson wanted new distributors to be permitted to achieve level five more slowly and organically. “In the old days, distributors would say, ‘Go build that downline as soon as possible’ … That works for very few people … That’s a lottery ticket. So the best way to build this business … is to build it through retail and retention, and recruiting will come Johnson explained at the retreat.

Parloff also discusses a report by the former director of the FTC's Bureau of Economics, Dr. Joseph Farrell. For you kids keeping score at home, that would the Director of the Bureau of Economics, to whom Dr. Peter Vander Nat would have reported to until May of 2012. In his 67 page report the former director found that there was "genuine consumer demand" and "no evident dependence on unsustainable growth." He summarized that purchasing patterns were consistent with the purchasing you'd see when distributors were fulfilling consumer orders and not gunning for bonus qualifications.

In Walsh's report on Friday, it's also revealed that yet another journalist has seen that 2005 videothe NY Post made out as a criminal recording and Walsh characterizes that video in the same light that Parloff did. 
"In the 2005 video, after Johnson acknowledges the potential for pyramiding, he outlines changes that the company has since enacted to reduce the turnover and financial burden borne by its lowest-level distributors."
One of these stories is not like the other.

No matter, the people whose opinion really matters have seen both the video as well as the Farrell report. Although it is unclear how long they have been in receipt of the video and Farrell report, the SEC does have these key pieces of data.

The options trade itself could be a complete coincidence, but there is a disturbing fact pattern regarding Pershing Square and what it knows before it should.

In the same month as the reported options trade, as well as the Post's skewed report on the Herbalife retreat video, there was a separately fascinating and somewhat bizarre sideshow. A Pennsylvania Senate candidate named Everett Stern claimed he met with Pershing Square. Not only did he claim he met with Pershing, he claimed that Bill Ackman himself stated on a preliminary phone call to Mr. Stern
“I am interested in us giving you the research we have on Herbalife and then you repackaging it and then filing a Whistleblower Claim with the SEC to trigger a Federal Investigation into Herbalife.”
Two days after that alleged call, Mr. Stern met with David Klafter and others at Pershing Square's offices. Mr. Stern claims that Mr. Klafter offered to pay Mr. Stern by allowing him to mimic Pershing's short position in Herbalife. Being that I was not in the meeting, I have no idea whether or not Mr. Stern's claims are true. Classic he said he said.

I will point out here that if you read Mr. Stern's report, there are some embarrassing errors I wouldn't expect to see from a "premium intelligence service" so it does bring to question the veracity of his claims. Apparently he felt strongly enough about the meeting and his accusations that he wrote a letter to Mary Jo White at the SEC. I've verified through multiple independent sources that Mr. Stern did in fact meet with Pershing Square on the day he claims, but beyond that I have no idea what was said between parties. A separate source which has worked for Pershing Square, and has also been in contact with other firms contracted by Pershing Square, stated that their firm had never been offered any soft dollar payments and had no knowledge of any soft dollar payments being offered by Pershing Square as a form of compensation.

In light of HuffPo's article, Mr. Stern's accusation is still a troubling one. Although I doubt Pershing Square put on the trade that Mr. Walsh outlined in his article, it's discomforting knowing that the very same month Pershing hosted a meeting with Mr. Stern during which Mr. Stern claims he was offered payment by a soft dollar mechanism which would be directly tied to the release of information known only to Pershing Square and Mr. Stern's team, there is a large derivatives trade suspiciously close to the release of the NY Post article. It begs the question whether Pershing Square knew about the NY Post's article and whether or not Pershing Square disseminated that information to someone else.

When asked whether Pershing Square knew about the 2005 video in advance of the Post article, and if Pershing Square knew about Celarier's story in advance of its publication, or if Pershing Square had seen the video since then Carnackman ebulliently responded: "May your favorite daughter be featured in NFL Films' Sack of the Week." Actually, I just made that up because Pershing Square still has not responded to last week's inquiry.

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