Activist investor Ackman attacks Herbalife's nutrition clubs; market shrugs off allegations
Activist investor Bill Ackman fired his latest salvo at the weight loss and nutritional supplements company Herbalife on Tuesday, alleging that one of the business models used by its distributors is evidence that the company operates as an illegal pyramid scheme.
Ackman's presentation focused Herbalife's "nutrition clubs," private settings where Herbalife's distributors sell the company's products like weight-loss shakes and also recruit others to sell Herbalife's products.
In a three-hour presentation, Ackman laid out a case that because Herbalife's nutrition clubs focus heavily on recruiting new members instead of selling products to consumers, the clubs are by definition functioning as a pyramid scheme.
Ackman, who runs Pershing Square Capital Management, an activist hedge fund, has bet heavily against Herbalife by using "short" trades that will be profitable if the value of the company's stock falls. Ackman has been trying to convince other investors to take similar positions, most memorably in a shouting match he got into with Carl Icahn, a rival investor, on live television in January 2013. Icahn has taken the opposite position from Ackman and has defended Herbalife.
The company has not been accused of any crime and insists that its operations are legal. The Securities and Exchange Commission, the Federal Trade Commission and the Attorneys General of New York and Illinois are investigating Herbalife, but no charges have been brought against the company since Ackman announced his short position in 2012.
Investors appeared to dismiss Ackman's latest allegations and sent the company's stock soaring. Herbalife shot up $13.15, or 25 percent, to $67.54. Trading volume was more than 15 times the daily average. The stock is still down 14 percent so far this year.
Nutrition clubs have become an increasingly lucrative business model for Herbalife in the last 10 years, with more than 4,000 operating in the U.S. alone, according to the company.
However, Ackman alleged that nutrition club attendees were not actually end consumers of the product. Instead nutrition club attendees were often recruits to become nutrition club operators of their own. These recruits should not be thought of as retail users of the product, but instead thought of as the next layer in the pyramid.
A pyramid scheme occurs when a company's primary mode of doing business is not selling a product or service to a consumer, but instead recruiting new participants to the company who in turn try to recruit new members. Pyramid schemes are illegal because they eventually collapse once there are no more people to recruit. They are similar to Ponzi schemes.
Herbalife has vigorously and repeatedly denied Ackman's arguments, and says it operates like a multi-level marketing company similar to Avon, Amway and Mary Kay.
"Once again, Bill Ackman has over-promised and under-delivered on his $1 billion bet against our company," Herbalife said in a statement.
Ackman bet $1 billion against Herbalife back in 2012, alleging that the company is a pyramid scheme and should be shut down by the government. Ackman said he spent $50 million of investors' money and two years investigating Herbalife.
Ackman argues he is in it for "the long haul" when it comes to Herbalife. He has also repeatedly said that any personal profits he would make from the collapse of Herbalife would be donated to charity.
At the end of his presentation in midtown Manhattan, Ackman appeared to tear up when discussing his campaign against the company. Ackman alleged that Herbalife's business model takes advantage of often poor people with minimal educations who are trying to find a way to start a business. Ackman called Herbalife CEO Michael Johnson "a predator."
"I hope he is listening," Ackman said.