This was the last thing Herbalife Ltd. needed.
Just as the Los Angeles company appeared to be regaining its footing from a Wall Street hedge fund manager’s assault, the company’s auditor resigned abruptly because of an alleged insider-trading scandal.
Accounting giant KPMG said Tuesday that Scott London, its chief Southern California auditor, had divulged financial information about Herbalife to a friend who then used those secrets to gain an edge in the markets. KPMG fired London, who had supervised Herbalife’s audits, and withdrew its approval of the company’s financial statements.
The accounting firm said there’s no evidence that London doctored Herbalife’s books. Still, KPMG’s unexpected moves are causing publicly traded Herbalife new pain.
Full coverage: KPMG auditor accused of insider trading
Without audited financials, the nutritional products company could be in violation of New York Stock Exchange rules, putting it at risk of having its stock removed from the exchange. On top of that, investors already skittish about Herbalife’s business model have a new concern: There is now no independent auditor vouching for the accuracy of its statements about sales and profits.
Herbalife shares fell $1.44, or 3.75% on Tuesday, closing at $36.95.
Company officials scrambled Tuesday to reassure investors that its financial statements are accurate and that the company’s stock will continue to trade as normal.
“We believe we are currently in compliance with the New York Stock Exchange listing requirements and we do not anticipate that the NYSE will initiate any type of proceeding to delist the company,” Herbalife said in a statement.
Still, even fans of the company said Tuesday’s events could prove disruptive for Herbalife.
Tim Ramey, an analyst with D.A. Davidson & Co. in Oregon who has long been bullish on Herbalife, downgraded the company’s shares Tuesday to neutral from a buy recommendation. He also reduced his one-year price target for the stock to $38 a share from $78.
Although it’s unlikely that the NYSE would delist Herbalife, Ramey said it could take a year for the nutritional supplements maker to hire a new independent auditor and have its financial statements approved. That in turn could damage its borrowing ability, he said.
“There is no reason to feel differently about Herbalife, its prospects, its historic performance or our outlook,” he said in a research report. “Yet as a stock, it will be a serious problem to be out of compliance — through no fault of their own — with NYSE requirements and potentially breach their loan covenants.”
Herbalife’s stock price has been on a wild ride since December, when billionaire hedge-fund manager Bill Ackman argued in a Wall Street presentation that the company is a pyramid scheme because it pays its independent distributors more money for recruiting than for selling its diet shakes, nutrition bars and supplements. Ackman bet
$1 billion that Herbalife shares would fall.
The company denied those allegations, arguing that its business model is legal and profitable. It pays distributors commissions from their own sales, as well as those they recruit into the business. The company reported record sales in 2012 — and won a key supporter: investor Carl Icahn, who now owns more than 15% of the company’s shares.