|Herbalife Shares Drop on Fraud Claims |
Herbalife Shares Fall After Fraud Discovery Institute Alleges Fraud
April 11, 2008: 03:24 PM EST
NEW YORK (Associated Press) - Shares of Herbalife Ltd., which sells nutritional supplements and weight-loss products, dropped Friday after a San Diego-based investigator leveled allegations of fraud against the company.
Shares fell $3.51, or 7.2 percent, to $45.09 in afternoon trading.
Barry Minkow, who now runs the Fraud Discovery Institute after serving a sentence for fraud at his own former company ZZZZ Best Co., released a list of "top 10 red flags for fraud" at Herbalife. The "flags" include senior managers allegedly dumping stock, high supervisor turnover and saturation in the market.
In the report on his Web site, Minkow said he reported to the Securities and Exchange Commission this month that he was shorting the stock to finance his investigation of Herbalife in China and produce You Tube videos of "Herbalife victims." By shorting the stock, Minkow bet the price would decline.
The Institute has accused the company of fraud before, saying Herbalife was operating a pyramid scheme and illegally recruiting distributors in mainland China.
Herbalife spokesman George Fischer said the company stands by the statement it released in November when Minkow made his initial accusation. The statement states "we have confidence in our direct-selling business model, our integrity and transparency as a NYSE-listed company and the fundamentals of our business."
Although investors appeared to be listening to the latest round of allegations Friday, Goldman Sachs analyst Simeon Gutman said in a note to investors he does not view the accusations as "troubling."
He said Herbalife discloses its supervisor turnover rate every year and nearly all insider selling was done with pre-planned 10b5-1 trading plans. Those plans allow a company insider to set up a program in advance for buying or selling shares and proceed with them even if he or she comes into possession of material nonpublic information.
Gutman said he was surprised by the share price drop but added the company's upcoming first quarter earnings report may give investors a reason to forget the allegations.
"In our view, the most effective refutation to any allegation is continued strong operating results," Gutman said.
The analyst said he expects the company to report earnings higher than investors expect