Simple Logic for Trading Herbalife (HLF)

The current situation regarding Herbalife is getting a lot of media attention so I thought I'd throw some cold logic into the mix.

The premise is that Herbalife, a multi-billion dollar multilevel marketing nutritional distributor, stands accused of operating a pyramid scheme. It seems that the main proponent of this accusation is Bill Ackman, a successful hedge fund manager of Pershing Square Capital Management LP which essentially placed a billion dollar bet that Herbalife was fraudulent and thus worthless.

While these accusations aren't new, Senator Edward J. Markey has recently asked regulators to investigate the issue. There have also been reports that Canada's top regulator has begun looking into the issue.

A quick scan of the twitter buzz on $HLF will make it clear that there are innumerable ways to spin and convolute the issue at hand. To me though, things are pretty cut and dry.

Does it really make sense to buy a stock that is under immediate threat of being found fraudulent?

It doesn't really matter what's true and what's being exaggerated for the short term. At this point, the risk of a major drop greatly outweighs the potential gain of treating this as a bounce play.