iShowdown Over Herbalife Spotlights New Wall Street By JULIET CHUNG One thing is clear about the financial

showdown shaping up between Wall Street gunslingers William Ackman and Daniel Loeb: Someone is probably going to lose a whole lot of money. Mr. Loeb's hedge fund disclosed Wednesday it owns an 8.2% stake now valued at $350 million in nutrition-supplements company Herbalife Ltd. Mr. Ackman's Pershing Square Capital Management LP has bet more than $1 billion against the company by shorting its stock.

Two hedge-fund rivals are squaring off over Herbalife, with one saying the nutritionalsupplements maker is a pyramid scheme and the other defending the company. Emily Glazer reports on Markets Hub. Photo: AP. "This is shaping up to be potentially the bloodiest hedge-fund battle of all time," said Robert Chapman Jr., an activist investor who has also accumulated shares in Herbalife since Mr. Ackman laid out his bearish case against the company last month when he said Herbalife was a pyramid scheme. Herbalife has called Mr. Ackman's presentation on the company a "malicious attack on our business model based largely on outdated, distorted and inaccurate informationWe are not an illegal pyramid scheme," the company said. The face-off between two high-profile, media-savvy hedge-fund managers highlights the arrival of a new wave of postcrisis financial stars. They tout their positions during television interviews and at conferences, in letters or securities filings and on customized Web pages, often convincing other investors to follow their lead. Their pronouncements move stocks, at times dramatically, and leave companies scrambling to respond. And when they take the opposite sides of the same trade the ensuing battle can captivate the financial world. "One of them is going to be very wrong," said Gregg Hymowitz, founder of the $8.2 billion EnTrust Capital, a longtime investor with both Mr. Ackman and Mr. Loeb's firms. "Ackman thinks it's a complete and utter fraud, and Dan thinks it's a completely legitimate business."

The Securities and Exchange Commission's enforcement division has opened an inquiry into Herbalife, according to a person familiar with the probe. An SEC spokeswoman declined to comment. The SEC disclosed last year that its corporate finance division had scrutinized Herbalife's financial disclosures. "We contacted regulators in connection with the current situation," an Herbalife spokeswoman wrote Wednesday. "Beyond that we have no comment." This isn't the first time Messrs. Ackman and Loeb have squared off. Mr. Loeb had taken a short position in J.C. Penney, a retailer that Mr. Ackman has sought to revive under former Apple Inc. executive Ron Johnson, according to people familiar with Mr. Loeb's holdings. Penney's new strategy hasn't paid off so far, with both sales and the share price slumping. Mr. Ackman has told his investors the turnaround will take time. The company has repeatedly said it would take years to turn around the chain. Herbalife sells protein shakes, energy drinks, vitamins and a bath and body-care line through independent distributors in 88 countries. Those distributors earn money on sales to consumers and from other distributors they sponsor and bring into the business, a system known as multilevel marketing. It reported a $117.8 million profit on sales of $1 billion in the third quarter.

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Herbalife, a direct seller of protein shakes and other products, has a cheerleading sales culture that has weathered a string of assaults from Wall Street and naysayers. Steven Russolillo reports on Markets Hub. Photo: Bloomberg. Mr. Loeb's Third Point Capital LLC disclosed its Herbalife stake in a securities filing on Wednesday, a day before Herbalife executives were slated to meet with investors to defend the company from Mr. Ackman's allegations. In a letter to his own investors, Mr. Loeb called Mr. Ackman's Herbalife thesis "preposterous." Mr. Ackman has said he has sold short more than 20 million shares of Herbalife at a cost of more than $1 billion, which means he has 9% of his firm's assets under management tied up on his bet.

When investors short a stock, they borrow shares to sell them, and profit when they can buy the stock back later at a lower price. But if a stock rallies, short-sellers can rack up losses in a hurry. "For every investment, we think about risk and reward," Mr. Ackman said Tuesday, "and we think the reward here is much greater than the risk." Mr. Loeb has 3% of his firm's $10.1 billion in investor money tied up in Herbalife. Herbalife shares surged above $41 Wednesday on news of Mr. Loeb's investment before sinking below $38 in late trading after The Wall Street Journal reported the SEC's inquiry into the company. It closed at $39.95 a share. Investors' roller-coaster ride began last May, when another hedge-fund manager, David Einhorn of Greenlight Capital Inc., dialed into an earnings conference call to ask Herbalife executives about the company's business model. The shares tumbled following the call by Mr. Einhorn, who hasn't disclosed if he has taken any position in Herbalife shares. A spokesman for Mr. Einhorn declined to comment Wednesday. Mr. Ackman launched his attack against Herbalife in late December. "The goal of our Dec. 20 presentation was to shine a spotlight on the company so that the world better understands the facts about Herbalife," said Mr. Ackman in a statement Wednesday. "The outcome of this investment is not about Pershing Square or anyone else who is long or short the stock. To the extent another investor, long or short, brings additional sunlight to the situation, we welcome them." In a letter to investors, Mr. Loeb called Herbalife a "well-managed company." "The short thesis rests on the notion that the FTC has been asleep at the switch, missed a massive fraud for over three decades, and will shortly awaken (at the behest of hedge fund short seller) to shut down the company," Mr. Loeb wrote. "We find this thesis to be preposterous." FTC spokespeople didn't immediately return calls seeking comment on Mr. Loeb's letter.

A person familiar with Mr. Loeb's thinking said he believes Herbalife shares could reach $60 to $100. The hedge-fund manager plans to attend Herbalife's investor meeting on Thursday, this person said. Third Point largely acquired its stake following Mr. Ackman's presentation, the firm wrote in the investor letter, which didn't identify Mr. Ackman by name. Mr. Loeb began looking at Herbalife when it was in the news and trading below its historic prices, a personal familiar with him said, and flew from a vacation in Mexico to meet with Herbalife management as he was still assembling his position.

Mr. Loeb's filing adds significant firepower to the group of hedge-fund managers who already have placed their bets against Mr. Ackman. Mr. Chapman, whose Herbalife stock comprises more than 35% of his fund's portfolio, doubts regulators would take significant action against the company. "At some point the curtain drops, the wizard is exposed and there's no limit to how high Herbalife stock can go," he said. Other investors that own Herbalife shares include Kerrisdale Capital Management and Bronte Capital, two small hedge funds that are best known for shorting companies. Sahm Adrangi, founder of the New York-based Kerrisdale, which manages about $130 million, said Wednesday he remained confident in his position despite the SEC inquiry into Herbalife. "Even if regulatory action is taken against Herbalife, its business is predominantly international," Mr. Adrangi said, adding that he believes the probability of Herbalife's U.S. business being impaired by regulatory action was low. "Short sellers know that stocks that go down that much are spoiling to bounce backand when the thesis itself is flawed, it's certainly very tempting to go long." Mr. Ackman says he got the idea to short Herbalife from Christine Richard, a friend and former reporter who now works as an analyst. Ms. Richard and her business partner, Diane Schulman, wrote a research report in February arguing that Herbalife was a pyramid scheme. The report claims that Herbalife's high-level distributors only buy the company's products to earn more commissions, and not actually sell them to consumers. The report also claims Herbalife has phony retail sales numbers. Herbalife has denied all these accusations. Jean Eaglesham, Emily Glazer and Sharon Terlep contributed to this article.

QUESTIONS: 1. Do you think that Mr. Ackman is involved in appropriate behavior in attacking Herbalife and attempting to drive its stock price to zero? 2. Since the multilevel direct selling model has been evaluated by regulatory authorities in the past, do you think that Mr. Ackman is providing any new information or insights that could change how regulatory authorities might view this sales model? 3. There are many hedge fund traders such as Daniel Loeb that reject Mr. Ackman's shorting of Herbalife's stock and are taking long positions betting that the price will continue to rise. Which side do you think will win in the long run, and why?