Herbalife To Pay $200M, Barely Dodges 'Pyramid Scheme' Label
Last week, The Federal Trade Commission announced it reached a settlement with nutrition and weight management company Herbalife. The company will pay $200 million into a consumer relief fund and restructure its compensation policy for distributors in order to avoid charges of operating an illegal multi-level marketing business, aka a pyramid scheme.
The recent Herbalife ruling is helping stock traders who are short selling their stock in the company. What is "short selling," you ask? It's the practice of borrowing a stock, selling the stock and then buying the stock back to return it to the lender. Short sellers make money by betting that the stock they sell will drop in price. When the stock drops, the short seller buys it back at a lower price and returns it to the lender.
"There was apprehension in the shorts, and they were actually closing down their positions in anticipation of the FTC report," says Ihor Dusaniwsky, head of research, S3 Partners to CNBC. "Once that happened, they actually read it and understood what [the report] said, they bounced back."
The documentary "Betting On Zero" sheds more light on the connection between Herbalife and short selling. Investors betting on the company failing because the business itself is built on failure, and targeting a certain demographic to facilitate it.