In months past, the stock has come under continual attack from famed hedge-fund manager Bill Ackman, who has publicly shorted the stock and even accused the multilevel marketer of operating a pyramid scheme. Today, however, the culprit is different: Herbalife's own auditor is behind the collapse of the stock, which is down 3.6% with an hour left in trading.
In a nutshell, the story goes like this. Last week, the company's auditor, KPMG, announced that it had fired a partner in its Los Angeles office who had apparently been feeding confidential information on the company to a third party, which was trading Herbalife stock.
This morning, Herbalife announced that as a result of these actions by the partner in question, KPMG has notified Herbalife that it's resigning as the Herbalife's auditor. KPMG says this employee may have compromised Herbalife's fiscal-year 2010, 2011, and 2012 audit reports, which can therefore no longer be considered "independent." KPMG has consequently resigned and withdrawn its endorsement of the financial-year reports in question.
For its part, Herbalife is attempting damage control, emphasizing that:
- KPMG's resignation is "solely due to the impairment of KPMG's independence resulting from its now former partner's alleged unlawful activities."
- "Herbalife's financial statements, its accounting practices, [and] the integrity of Herbalife's management" have not been impugned.
- None of the audit reports (albeit now withdrawn) "contained an adverse opinion or a disclaimer of opinion, nor was any such report qualified or modified as to uncertainty, audit scope or accounting principles."
- There were never any "disagreements with KPMG on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedures."
As such, Herbalife says it stands by the accuracy of the reports, even if KPMG no longer does, averring that "the Company's financial statements covering the referenced periods fairly present, in all material respects, the financial condition and results of operations of the Company as of the end of and for the referenced periods."
Investors, now beginning to absorb the import of the news, are beginning to rethink the sell-off. The stock has slowly been recovering some of its losses this afternoon.
Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool has the following options: Long Jan 2014 $50 Calls on Herbalife Ltd. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.