Bill Ackman's Herbalife Short Is Subprime Bet 2.0: Street Whispers

Tickers in this article: HLF MBI

Eventually, a subprime credit crunch that started on the streets of California, Nevada, Florida and Arizona, among others, caused trillions in losses and big returns on short bets for the likes of Ackman, David Einhorn of Greenlight Capital Management , John Paulson of Paulson & Co. and Kyle Bass of Hayman Capital Management . Those trades ultimately paid off when money fled financial markets and exposed the poor fundamental quality of institutions like MBIA and the securities they were involved in.

In multiple public disclosures, Herbalife has forcefully rebutted Ackman's claims. "Herbalife is not an illegal pyramid scheme," the company said in a December statement refuting a Dec. 20 presentation by Ackman of his short thesis.

Herbalife will present a rebuttal to Ackman's claims and an overview of its fast-growing business on Jan. 10 and has hired financial advisor Moelis & Co. and law firm Boies Schiller , as part of its defense.

Wall Street has also provided Herbalife support against Ackman's claims. Herbalife shares have gained back most of their ground since Ackman unveiled his short trade on Dec. 19. Meanwhile investors and analysts see claims that Herbalife is a pyramid scheme as without merit.

Hedge funders Robert Chapman of Chapman Capital and John Hempton of Bronte Capital say that Herbalife's business is legitimate.

Both funds, they say have made bets in favor of Herbalife and against Ackman.

"Despite beguiling and specious reasoning, Ackman will fail to influence/cause a material regulatory response or a HLF distributor exodus," writes Robert Chapman, in a blog post that celebrates a 35% return betting against Ackman.

Hempton of Bronte Capital simply argues Herbalife's earnings and ability to buy back stock can thwart Ackman's bet against the company, even if they are "scumbags," as he writes.

More directly, analysts such as Tim Ramey of D.A. Davidson & Co. simply refute Ackman's allegations that Herbalife could be deemed a pyramid scheme by regulators such as the Federal Trade Commission or the Securities and Exchange Commission .

While Ackman argues 90% of Herbalife's profits come from distributors and not bona fide retail demand, Ramey of D.A. Davidson argues in a January note to clients the majority of Herbalife's earnings come from retail demand, disqualifying it as a pyramid scheme.

In previous research reports, Ramey has discounted Ackman's understanding of Herbalife's retail appeal. Still, the analyst has previously left open the prospect of a distributor exodus. In recent days, Herbalife distributors have expressed confidence in the company to The Wall Street Journal , in on-the-record interviews.

Ultimately, Ackman's accusation that Herbalife is a pyramid scheme isn't likely to be solved in a point-by-point rebuttal of Ackman's 300-plus-age short thesis in the company's Jan. 10 presentation, according to Ramey of D.A. Davidson, who writes in a client note, he expects a more high-level business overview and greater detail on the company's distribution between retail and distributor earnings.