The CEO of Herbalife, a company that sells weight management products, on Wednesday criticized a hedge fund manager who is shorting the company's stock based on the belief that it is a pyramid scheme, calling that idea "bogus."
Michael Johnson said in a statement to the press that William Ackman, who oversees $11 billion in assets at Pershing Square Capital Management and who confirmed Wednesday he was shorting Herbalife stock, should be investigated by the U.S. Securities and Exchange Commission.
"This appears to be yet another attempt to illegally manipulate the market by a group of overzealous short-sellers," Johnson said.
Ackman, one of the world's biggest hedge fund managers, said on Wednesday he is shorting Herbalife Ltd, a move that helped send the weight management products company's stock down more than 12 percent. The stock fell $5.16, or 12.14 percent, to end at $37.34.
Ackman is expected to spell out his reasons for the move at a hastily arranged investment conference in New York on Thursday.
Traditionally, Pershing Square has been known to take long positions in companies like Procter & Gamble and JC Penney, so a short position is particularly noteworthy.
Speculation has been mounting for months that a large hedge fund manager was betting against the Herbalife amid growing questions about its business strategy. Since January, Herbalife's stock price had fallen 17 percent.
Now it is believed that Ackman, whose moves are followed very closely in the industry, is not alone in his worries about Herbalife. Other traders who normally short stocks are also said to be targeting Herbalife, believing the company is a multi-level marketing pyramid scheme.
A person familiar with the thinking of some of the short sellers said multi-level marketing companies begin operating like a pyramid scheme when most of their sales are to other distributors of the product, as opposed to people who have no connection to the company.
In May hedge fund manager David Einhorn, who runs Greenlight Capital, asked Herbalife executives about what percentage of its products are sold to consumers that are not distributors and was told that "we don't have visibility to that level of detail."
Investors had expected Einhorn to say something about the stock publicly when he presented his best stock ideas at the Ira Sohn Investment conference to benefit childhood cancers in May. But he was silent on Herbalife.
Ackman will present his new idea at what is being billed as an inaugural Sohn Conference Special Event.
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