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TheStreet Open House

5 Dumbest Things on Wall Street This Week: April 12

3. D.A. Davidson Dumbness

Even with all our vast resources here at the Dumbest Lab, it's getting hard for us to account for all the insanity surrounding Herbalife (HLF). Maybe we better hire an analyst and an auditor before the situation spins out of control.

On second thought, perhaps not.

Big Four accounting firm KPMG resigned as auditor for the besieged supplement seller, as well as shoe purveyor Skechers (SKX) Tuesday, amid an FBI investigation into insider trading allegations involving a former senior partner named Scott London. London, who was based in Los Angeles along with both companies, admitted to sharing inside information and has subsequently resigned. Shares of Herbalife fell 4% to $37 while Skechers stock ended up 2% at $22.00 on the news.

"The partner was immediately separated from the firm," KPMG said in its statement. "This individual violated the firm's rigorous policies and protections, betrayed the trust of clients as well as colleagues, and acted with deliberate disregard for KPMG's long-standing culture of professionalism and integrity."

Well, we don't know about that last part. If you remember, KPMG did have to pony up $456 million to regulators in 2005 for selling fraudulent tax shelters. Still, at least the firm was smart enough to feed London to the government's regulatory werewolves and disown three years of his work before he damaged the firm's reputation any further.

Herbalife also attempted to separate itself from the rogue accountant. The company issued a statement saying that KPMG's decision to withdraw had no relation to Herbalife's accounting practices or its management, both of which have been called into question by hedge fund manager Bill Ackman in his quest to drive the stock lower.

And while this KPMG silliness had no direct connection to Ackman's battle with fellow billionaire Carl Icahn over the very validity of the company, it did spill over into the stock through an amazingly asinine research report from analyst Timothy Ramey of D.A. Davidson.

Ramey, a longtime Herbalife bull, downgraded his view of the shares to neutral from buy based on the KPMG kerfuffle, and lowered his price target to $38 from $78.

"This is and will be disruptive to the stock, but hopefully not the company," wrote Ramey. "Herbalife will likely have an excellent cause-of-action against KPMG, and clearly they will have their audit fees refunded for the past three years. But for now it would be imprudent for us to continue recommending purchase of Herbalife's shares."

Excuse us, but "Hopefully not the company"? "Imprudent" to recommend the shares? What is it with this guy? Is he selling Herbalife on the side? Doesn't he know analysts are supposed to shill for investment bankers, not supplement sellers?

In case you forgot, Ramey is the same analyst that attacked Ackman for his bearish presentation about the company that sent the stock reeling in December. And while Ackman may have his own faults -- just read that Vanity Fair piece on him, oy! -- there is no question that he is far more meticulous than most analysts on Wall Street.

Back in December when the stock was getting shellacked, Ramey reiterated his buy on the stock with an ad hominem shot at Ackman, saying Herbalife's customers "may not look like the people Mr. Ackman knows in Chappaqua, but they are out there, and in growing numbers; weight loss is becoming a growing industry."

That's pretty personal Tim! And while you found a convenient way to slash your rating and price target via this ridiculous KPMG story, it does not belie the fact that Ackman, pompous ass he may be, has been proven right so far on Herbalife, while you remain way, way off base.

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