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Soros jumps into fray at Herbalife

Aug. 1, 2013 at 4:35 PM   |   Comments

LOS ANG, Calif., Aug. 1 (UPI) -- Yet another billionaire investor has stirred the pot at Herbalife Ltd., buying shares of the California company that one billionaire called a pyramid scheme.

Investor George Soros has purchased a significant share of the nutritional products company although not enough to force him to file with regulators, which is mandatory if someone buys 5 percent or more of a public corporation, the Los Angeles Times reported Thursday.

Soros, whose hedge fund, Soros Fund Management, controls more than $8.5 billion in equities, is the third billionaire to gamble on the company's fortunes. Activist investor Carl Icahn has also invested in the company, buying 17 million shares, which are valued at more than $1 billion, the Times reported.

Icahn has recently put himself in a position to put two directors on the company's board.

News that Soros had bet on the company boosted shares, which gained more than 9 percent to $65.50.

Icahn and Soros are betting that a third billionaire, William Ackman, is wrong about the company he has called a pyramid scheme, which is generally a company in which sales associates lose money, but those who recruit sales associates do well, as they are paid bonuses for recruiting new associates.

Ackman in December took a massive short position in the company, which means he would make money if Herbalife shares go down.

Usually, investors buy cheap and sell high. A short position is the same, but in the reverse order: Sell high first, then, if possible, buy cheap.

With a short contract, an investor borrows shares, and sells them at a high price, but with a contract that obligates the investor buy the shares back later.

Herbalife shares tanked on Christmas Eve at $24.24 per share after Ackman called the company a pyramid scheme.

Several consumer groups have asked the Federal Trade Commission to investigate. If regulators conclude the company is running an illegal sales operation, the shares could become worthless and Ackman would come out on top.

Market analyst Timothy Ramey at D.A. Davidson & Co. said Soros has likely done his homework and decided Herbalife is legitimate.

"I don't think he would do it if he wasn't comfortable with Herbalife's business model," Ramey said.

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