Ackman Caught With Shorts Down as Loeb Gets Long on Herbalife

Updated to include Third Point comments and report of SEC inquiry.

NEW YORK ( TheStreet) -- Dan Loeb's Third Point Capital said on Wednesday it has bought nearly 9 million shares in Herbalife ( HLF), in a move that cuts against a short position in the embattled supplements seller by Bill Ackman of Pershing Square Capital Management.

Third Point's long position amounts to over 8% of Herbalife's stock, while Ackman holds a short position over double in size.

The disclosure by Third Point, which is also a top investor in Yahoo! ( YHOO) and AIG ( AIG) comes a day before the supplements seller with a multi-level marketing arrangement will publicly respond to Ackman's short position, which was disclosed on Dec. 19, 2012.

A 13-D filing with the Securities and Exchange Commission shows that Third Point has acquired 8,900,000 Herbalife shares, representing an 8.24% economic interest in the company. The filing does not state intent by Third Point in its large position. (The hedge fund is often an activist investor)

In a letter sent to Third Point investors obtained by the New York Times, Loeb writes that allegations of a Herbalife pyramid scheme are without merit and are unlikely to to warrant a closer look by regulators.

"The pyramid scheme is a serious accusation that we have studied closely with our advisors. We do not believe it has merit," writes Loeb.

According to Wall Street Journal reports citing sources, the SEC has opened an inquiry into Herbalife

Shares in Los Angeles-based Herbalife initially surged 9% on the disclosure, but have faded to near 4% gains that put the stock at $39.87 in late afternoon trading.

Ackman, who unveiled his bet against Herbalife to CNBC on Dec. 19, subsequently told Bloomberg News that part of his intent in detailing the short trade just ahead of the New Year was to undermine confidence among Herbailife's distributors prior to their 2013 re-up, potentially toppling a pyramid scheme he alleges the company orchestrates.

A more than three hour long presentation made at the Ira Sohn Conference a day later detailed Ackman's reasoning behind his short trade and a web site created by the Pershing Square lists a 300-page plus powerpoint presentation made by the hedge fund.

In multiple public disclosures, Herbalife has forcefully rebutted Ackman's claims. "Herbalife is not an illegal pyramid scheme," the company said in a December statement refuting the Dec. 20 presentation by Ackman of his short thesis.

Herbalife will present a rebuttal to Ackman's claims and an overview of its fast-growing business on Jan. 10 and has hired financial advisor Moelis & Co. and law firm Boies Schiller, as part of its defense.

Wall Street has also provided Herbalife support against Ackman's claims. Herbalife shares have gained back most of their ground since Ackman unveiled his short trade on Dec. 19. Meanwhile investors and analysts see claims that Herbalife is a pyramid scheme as without merit.

Hedge funders Robert Chapman of Chapman Capital and John Hempton of Bronte Capital say that Herbalife's business is legitimate.

Both funds, they say have made bets in favor of Herbalife and against Ackman.

"Despite beguiling and specious reasoning, Ackman will fail to influence/cause a material regulatory response or a HLF distributor exodus," writes Robert Chapman, in a blog post that celebrates a 35% return betting against Ackman.

Hempton of Bronte Capital simply argues Herbalife's earnings and ability to buy back stock can thwart Ackman's bet against the company, even if they are "scumbags," as he writes.

More directly, analysts such as Tim Ramey of D.A. Davidson & Co. simply refute Ackman's allegations that Herbalife could be deemed a pyramid scheme by regulators such as the Federal Trade Commission or the SEC.

While Ackman argues 90% of Herbalife's profits come from distributors and not bona fide retail demand, Ramey of D.A. Davidson argues in a January note to clients the majority of Herbalife's earnings come from retail demand, disqualifying it as a pyramid scheme.

In previous research reports, Ramey has discounted Ackman's understanding of Herbalife's retail appeal. Still, the analyst has previously left open the prospect of a distributor exodus. In recent days, Herbalife distributors have expressed confidence in the company to The Wall Street Journal, in on-the-record interviews.

Ultimately, Ackman's accusation that Herbalife is a pyramid scheme isn't likely to be solved in a point-by-point rebuttal of Ackman's 300-plus-age short thesis in the company's Jan. 10 presentation, according to Ramey of D.A. Davidson, who writes in a client note, he expects a more high-level business overview and greater detail on the company's distribution between retail and distributor earnings.

For more on Ackman's Herbalife short, see why analysts are getting personal. Also see why Ackman's short may be similar to a bet against the shares of bond insurer MBIA.

-- Written by Antoine Gara in New York

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