Bill Ackman is taking his battle with Herbalife to the company’s outside accounting firm, PricewaterhouseCoopers.
Ackman’s Pershing Square hedge fund has fired off a 52-page letter to the auditor, detailing a litany of “serious accounting, taxation and disclosure issues” at the controversial nutrition products company.
The Aug. 29 letter, which was sent to Pershing’s investors Tuesday night, follows a 13 percent gain in Herbalife shares this month, fueled by speculation that PwC is on the verge of signing off on Herbalife’s financials.
Some analysts and investors have speculated that the completed audit would allow Herbalife to finance a $2 billion share buyback — potentially crushing Ackman’s $1 billion short on the company. The latest missive could slow down the process, giving Ackman more time for an announcement of a significant regulatory action that would spook the banks, investors said.
“The letter Ackman dropped in PwC’s inbox could buy him some time to thwart a leveraged recap, but the clock’s nearing midnight so he’d better hurry,” said Robert Chapman of Chapman Capital, who previously had a long position in the stock.
PwC has no choice but to take his letter seriously and investigate each and every one of the claims, said accounting experts. As a result, it could push the audit back at least 60 days, said CPA Francine McKenna, a former PricewaterhouseCoopers accountant. “It’s a long list, and it’s going to take them a while,” she said, especially if the Securities and Exchange Commission gets involved. SEC investigators were copied in on the letter.
In December, Ackman launched a short attack on the multilevel marketing company, calling it a pyramid scheme and urging regulators to investigate it. Herbalife, whose shares hit a 52-week high of $68.82 on Tuesday, has denied his allegations. It fell 1.64 percent yesterday to close at $66.60 after Ackman released the accounting letter.
“As Mr. Ackman continues to lose his investors’ money on a reckless $1 billion bet against Herbalife, he has become increasingly desperate. Unfortunately, this is just the latest example,” Herbalife said in a statement.
In the letter, Ackman warned the accountant’s top executives that if the firm fails to inform investors of the risk that Herbalife is a pyramid scheme, “PwC may incur substantial liabilities in the event of the company’s failure.”
He also argued that Herbalife underreports its distributor commission expenses by as much as $300 million a year, which overstates its profit margins.
“Investors and regulators are misled as to the true amount of recruiting-related incentives paid by the company to its distributor base — a key factor in the determination of the legality of Herbalife’s network marketing scheme,” Ackman wrote.
The company could owe the US hundreds of millions of dollars in taxes on foreign income that it may be forced to repatriate to the US, according to the letter.
Ackman estimated that the company may owe as much as $600 million to Nevada, where its US business is incorporated, in unclaimed checks to distributors that it keeps instead of turning them over to the state, as required by law.
And he also hinted that whistleblowers have given his Pershing Square hedge fund information regarding alleged bribes in Herbalife’s international operations – potentially the most serious issue in the report.
“The objective of the letter was to bring to their attention, in detail, serious accounting, taxation and disclosure issues that we have identified,” Pershing said in the note to investors Tuesday night, along with the PwC letter, which was obtained by The Post.
PwC signed on as Herbalife’s auditor this spring after its former accountant, KPMG, resigned amid an insider trading scandal involving the partner assigned to the Herbalife account. Herbalife was not implicated in the scandal.
PwC must re-audit the past three years of financials and approve this year’s quarterly filings, which it has not yet done. Herbalife said during its quarterly call in July that it will have the audit done by the end of the year.
The company’s stock has risen recently on speculation by DA Davidson analyst Tim Ramey that the audit could be completed by the end of the month, opening the door to a bank-financed massive share buyback. Yesterday, Ramey dismissed Ackman’s accounting questions and said he doesn’t think the letter will slow down the audit.
Ackman has said he doesn’t believe a bank will lend Herbalife that kind of money, given the regulatory cloud over it.
Ackman’s letter was addressed to PricewaterhouseCoopers International Chairman Dennis Nally and Chairman and Senior Partner Robert Moritz. Copies were sent to Herbalife audit committee board members and to SEC enforcement lawyer Liora Sukhatme and SEC CPA Christopher Mele.