An important battle revolving around the auditing of financial statements has broken out in the Wall Street war over Herbalife.
William Ackman, the billionaire hedge fund manager whose Pershing Square hedge fund is shorting Herbalife’s stock in a massive way, has sent a warning letter to top-level officials at Price Water House , the accounting firm that Herbalife hired to audit its financials in May.
In the 52-page letter, Ackman warns Dennis Nally, global chairman of PwC, and Robert Morris, chairman of the U.S. firm of PwC, that PwC “may incur substantial liabilities in the event of the company’s failure” if Ackman’s allegation that Herabalife is a pyramid scheme is proven correct. Ackman’s letter consists of 12 parts, which ask questions like “does Herbalife improperly account for wholesale commissions as an offset to revenue to disguise the fact that it’s a pyramid scheme?”
In his effort to win the Herbalife war, Ackman has appealed to the Federal Trade Commission, lobbied Congress, and lodged complaints with the Securities & Exchange Commission. Now, his campaign against Herbalife also includes a warning to auditors. So far Ackman’s $1 billion bet against Herbalife’s stock has been disastrous, weighing down the returns of Pershing Square’s hedge fund as the U.S. stock market soars.
Herbalife’s stock is up by more than 100% in 2013 as major investors like Carl Icahn, George Soros and William Stiritz have taken big stakes in the company. Shares of Herbalife sunk by 2% on Wednesday.
The Wall Street war over Herbalife has been heated and involved several skirmishes, some of them broadcast on live television. But one of the most important moments occurred when KPMG resigned as Herbalife’s auditor in April. KPMG did not resign because of Ackman’s allegations against Herbalife or anything that Herbalife had done, but because the KPMG partner in charge of the Herbalife audit, Scott London, turned out to be a criminal. He pleaded guilty to giving inside information to a friend about Herbalife and other clients.
KPMG’s resignation left Herbalife with more than three years of unaudited financials. The company’s most recent quarterly financial statements also have not been reviewed by a certified public accountant. That has not seemed to hurt Herbalife with stock market investors too much, given the stock’s performance since the scandal at KPMG emerged.
But it has meant that Herbalife has had to back off from its plans to conduct a big debt-funded stock buyback that would have potentially put pressure on Ackman’s short position. John DeSimone, Herbalife’s chief financial officer, at a conference in April that the company was “putting together a meaningful new debt arrangement that if done would be used to buy back stock.”
It’s unclear if Herbalife’s executives and board would still consider a buyback now that the stock has jumped, but without audited financials it seems that option is not on the table. Herbalife has said it expects the audited financials to be completed by the end of the year.
Get more information, facts and figures about Herbalife, click here for the Herbalife overview.