You’ve probably heard of Herbalife (HLF) before… whether it be from a friend who tried to get you into the company, or if you watched the Netflix documentary, Betting on Zero, starring billionaire hedge fund investor Bill Ackman.
Heck, there was even a CNBC Special — the “Battle Of The Billionaires” — featuring Carl Icahn and Bill Ackman— all centered around Herbalife.
Bill Ackman came out at the Sohn Conference in 2012 and attacked Herbalife with a 300+ slide presentation, and put his money where his mouth was.
He noted HLF was a pyramid scheme doomed to fail. However, 5 years after his massive bet against the company… he had to take his licks and unwind his position—losing nearly $1B for his investors.
Icahn won the battle… and that’s because he didn’t let his emotions get in the way.
Not only that, but he used the options market to establish his bullish opinion in HLF. He was able to become a corporate “insider” on the cheap, and of course, he knew what his downside was.
When it comes to trading and investing, Icahn is what many would call a genius… and he got out of a chunk of his position when the time was right.
It was what seemed like a well-timed trade, but since he was close to the company… he may have known something.
There’s something we could learn about the Herbalife battle… and I think it could help us tap into the minds of the Wall Street whales.
Herbalife’s Intricate Business Model
Herbalife is currently available in 94 different countries, the company’s global presence is what got Herbalife into a $20M jam for misleading investors.
You see, slinging Herbalife products in the U.S. and most places around the world is a whole different game than trying to sell those shakes in China. China’s laws allow people to directly sell their products. However, the structure of the company is completely forbidden.
Herbalife is a multi-level marketing (MLM) company, technically not a pyramid scheme (that’s why it’s 100% legal in the U.S).
Basically, the way MLMs work is simple — it’s recruiting, on top of recruiting, on top of recruiting, with bit sales sprinkled in. The more people someone recruits to sell Herbalife products, and the more they recruit, the more money they make.
93 countries let Herbalife follow this typical format. However, China is a whole different game because MLMs are against the law.
HLF Didn’t Care About Investors
What’s worse is investors didn’t get informed about the risks involved in Herbalife’s unusual compensation procedure in China, which brought rise to the matter. Of course, the company didn’t care. Instead, they tried to cover their tracks.
Herbalife made a statement explaining its operations in China, “Our independent service providers in China are compensated with service fees instead of the distributor allowances and royalty overrides utilized in our traditional marketing program.”
Herbalife even alleged that its service providers were paid an hourly wage, a substantial difference from anywhere else in the world.
The issue here was the fact the company’s statement was 100% false and misleading to investors.
How so?
Herbalife’s compensation model in China is damn similar to the other 93 countries it operates in. In fact, the compensation is almost exactly the same despite the MLM issue.
Smells fishy, right?
Herbalife’s Web Of Lies
Here’s how they tried to fineness the MLM issue.
HLF calculated the pay in the Chinese market based on downline purchases, with bit of accounting adjustments. The result being the pay for selling Herbalife in China is almost the exact same as MLM friendly countries.
To top off Herbalife’s web of lies, China’s service providers didn’t even have to list their hours or describe the work they did on the invoices they sent in! The company kindly provided pre-printed sheets with hours for services rendered. All they needed to do was sign the papers.
Why this is all so important is Herbalife’s public fillings had China as Herbalife’s LARGEST region of revenue growth from 2012 to 2015.
In 2015 it accounted for 19% of all worldwide sales. In 2017 and 2018 it accounted for about 20% of Herbalife’s sales worldwide. In 2017 and 2018 China had around $886 million and $1 billion in net sales.
Think about it, all these numbers came from little pre-printed invoices to skirt pyramid scheme laws.
Former Herbalife salespeople in China spoke out and noted the invoices they received didn’t even remotely resemble the actual hours they worked. Most salespeople’s invoices typically had identical hours to that of the Herbalife text they received telling them their eligible hours.
In 2015 and 2016, out of the 389,539 Herbalife salespeople who submitted invoices in China, only .05% of the payments differed from the texted amount.
Herbalife cruised along with this business model for years, reporting bogus numbers and making false public statements.
Finally, after 6 years Herbalife got caught.
The Securities and Exchange Commission charged Herbalife with making false and misleading public statements about China’s service provider compensation. Which in turn denied investors of the vital data they needed to fully gauge the risk of investing in Herbalife stock.
Herbalife tapped out to the SEC’s findings that it violated specific anti-fraud and reporting provisions under the federal securities laws. But it never admitted or denied a thing. However, Herbalife had to chalk up a $20 million penalty as well as cease and desist from making this error again. That’s just a slap on the wrist for the multi-billion dollar company.
How To Profit Off The Backs Of Wall Street “Insiders”
The thing is, if you were able to spot Carl Icahn’s massive buying in HLF… you could’ve locked down a monster winner.
He started to purchase call options in Herbalife and started off with a 13% stake in the company, controlling a whopping 11M shares. He more than doubled his money at one point on a portion of his options position… and you actually could’ve taken part if you had the right strategy in place.
When it comes to the options market, it becomes very hard to hide your moves. Every options trade that goes off on U.S. exchanges must be reported to the Options Price Reporting Authority (OPRA).
That means the information is there for the world to see. The only thing we don’t know is why the Wall Street whales are placing these massive bets… and of course, we don’t know who is actually behind the trade.
When I see a massive options order hits the tape, all I know is the someone is buying and I should keep an eye on the trade.
Let me show you how it all works.
I spotted a massive options order go off in Beyond Meat (BYND).
A massive options player swept up about 1,000 calls in BYND… and there was a potential catalyst event. Not only that, but the chart signaled BYND could catch a massive bounce.
BYND found support and the next resistance level to keep an eye on was around $85. So I figured that the stock could get there real quick. Not only that, but if it broke above that level, it could test the $100 level and fill the gap.
Here’s what happened with BYND just a few days after I got in…
Right to that resistance level!
Now, rather than holding onto the trade (the expiration date on the calls I purchased was fast approaching), I decided to take my profits and re-evaluate the play.
I was able to lock in a 33% winner, but some of my clients were able to do much better than I did…
I had a 260% win on BYND calls, my largest ever, so no, not sleepy LOL ~ Craig M.
How were we able to lock in this massive winner?
By using my Dollar Ace strategy. It’s designed to sniff out the moves of Wall Street’s best options traders, and we can legally ride their coattails.
My Dollar Ace scanner flags down smart-money bets and tells me what they’re buying and the type of move they’re expecting from the trade.
By tracking their footprints, we’re able to get into the same trades, and profit alongside them. If you’re ready to take advantage of this unfair edge in the options market, click here