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The Morning Brief: Herbalife’s Stock Surges After Going-Private Talks

The news was not good for Pershing Square Capital Management founder Bill Ackman, who maintains a big short bet against the multi-level marketer of nutrition products.

  • By Stephen Taub

The tug-of-war between Carl Icahn and Bill Ackman over Herbalife played out dramatically on Monday. Shares of the multi-level marketer of nutrition products surged nearly 10 percent, to close at $68.04, after the company announced it recently held discussions over a possible going-private deal with a prospective financial investor. It said the conversations were formally terminated on August 16. It did not name the investor.

A takeover or going-private deal would be a nightmare for Ackman’s Pershing Square Capital Management, which has held a major negative bet on Herbalife’s stock for several years. Herbalife also announced a “modified Dutch auction” self-tender offer to purchase for cash up to $600 million of its shares for no less than $60 per share and no greater than $68. Shareholders who participate in the tender offer will also receive a non-transferable contingent value right (CVR), which allows them to receive a contingent cash payment should Herbalife be acquired in a going-private transaction within two years of the launch of the tender offer. The company said in a press release that the cash offer with a CVR “is an appropriate way to return capital to shareholders that seek liquidity under current market conditions while, at the same time, providing such tendering shareholders potential additional value in the event Herbalife is taken private within two years.”

Herbalife also said it entered into a deal with Icahn — who with his entities owns 24.52 percent of the shares — who agreed not to own more than 50 percent of the shares over the next two years unless he agreed to acquire all of the shares. Icahn over the weekend also announced he would no longer serve as an advisor to the Trump Administration.

Already in 2017, Herbalife has repurchased about $299 million of its shares on the open market under its current $1.5 billion share repurchase plan. “We believe this tender offer provides us an efficient way to buy back additional shares at an attractive price,” states chief financial officer John DeSimone in a press release.

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Deerfield Management Co. agreed to pay more than $4.6 million to settle charges by the Securities and Exchange Commission that it failed to establish, maintain, and enforce policies and procedures to prevent the misuse of inside information, including information about confidential government decisions. The hedge fund agreed to the settlement without admitting or denying the findings. Deerfield is censured and must pay disgorgement of $714,110 plus interest of $97,585 and pay a penalty of about $3.95 million.

In its announcement, the regulator said the action is related to insider trading charges recently filed against current and former Deerfield analysts, a political intelligence analyst who passed them information, and an employee at the Centers for Medicare and Medicaid Services (CMS).

We reported in May that Theodore Huber and Robert Olan, partners and analysts at Deerfield, were charged with conspiracy, wire fraud, and other charges, with the government alleging that they participated in a scheme from 2012 through 2014 to use secret, confidential government information from CMS to execute profitable trades. The government also had unsealed charges against former Deerfield partner and analyst Jordan Fogel, who previously pleaded guilty and is cooperating with the government. Political intelligence consultant David Blaszczak and CMS employee Christopher Worrall were also arrested for their roles in the scheme.

The government alleged that Deerfield netted more than $3.5 million from these trades. According to the government, the individuals used confidential information related to CMS’s internal deliberations regarding coverage and reimbursement decisions; Blaszczak was separately charged with obtaining confidential CMS information about cuts in CMS’s reimbursement rates for home health providers, and for providing the information to Christopher Plaford, a portfolio manager at Visium Asset Management, a hedge fund firm that shut down last year following its own legal woes. Plaford previously pleaded guilty and is also cooperating with the government.

Deerfield was founded in 1994 by Arnold Snider, who was a Tiger Cub, having previously worked for Julian Robertson Jr.’s Tiger Management. He retired in 2005. The firm is currently headed by James Flynn, who has been with Deerfield since 2000. It manages more than $7 billion, but not all is believed to be invested in hedge funds. Its hedge fund gained about 5.1 percent in the first half of this year after losing money in the second quarter. It posted gains of 8.63 percent, 11.7 percent and 30.4 percent in 2016, 2015 and 2014, respectively.

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ValueAct Capital bought more than one million shares of Trinity Industries, boosting its stake in the industrial conglomerate to 11 percent. The San Francisco hedge fund firm known for taking activist positions has not publicly stated any possible proposals it has made to the company.

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