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What: Shares of Herbalife rose as much as 14% on Wednesday after the nutritional supplements distributor won the dismissal of a shareholder lawsuit alleging that it had "fundamentally misrepresented the nature, scope and legality of [its] business and operations to consumers and investors alike" by taking on the guise of a legitimate multi-level marketing company to conceal an illegal pyramid scheme. By 1:15 p.m., the stock was up about 9.5% from the previous close.
So what: The ruling from U.S. District Judge Dale S. Fischer is the latest turn in an aggressive, two-plus-year campaign by Pershing Square Capital Management's Bill Ackman to expose what he believes is an illegal pyramid scheme.
Last week, it emerged that federal prosecutors and the FBI were probing whether consultants -- some of whom did work for Pershing Square -- made remarks to regulators concerning the company that could amount to stock manipulation. Neither Pershing Square nor Bill Akcman have received subpoenas or been interviewed by the FBI in that matter.
Pershing Square Capital Management has a substantial short position betting against Herbalife shares. Ackman said last week that, with Herbalife's stock in the mid-thirties, the position is close to breakeven.
Now what: Monday's decision from Judge Fischer does not put an end to Herbalife's legal/ regulatory concerns. For one thing, plaintiffs can still amend their complaint. Furthermore, Herbalife faces an ongoing probe by the Federal Trade Commission. Still, it will perhaps give the company (and its shareholders) confidence that these matters will eventually blow over. Nevertheless, I would advise investors to avoid Herbalife: Whether or not it is a fraud may still be a matter of debate, but that it is a mediocre business is indisputable.
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The article Why Shares of Herbalife Ltd. Are Up on Wednesday originally appeared on Fool.com.
Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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