Herbalife Ltd., the maker of weight-loss and nutritional supplements, fell for a second day as hedge fund manager Bill Ackman said he’s more certain about his short position on the company than he’s ever been in an investment.
The shares fell 10 percent to $33.70 at the close in New York after sliding 12 percent yesterday, which was the biggest decline since May 3. Cayman Islands-based Herbalife had dropped 18 percent this year through Dec. 18.
Ackman, head of New York hedge fund Pershing Square Capital Management LP, said at the Sohn Investment Conference in New York today that a year of research convinced him Herbalife is a pyramid scheme. The company, whose shares he began selling short seven to eight months ago, misrepresents sales figures, misleads distributors about potential earnings and sells a commodity product at inflated prices, he said.
“This is the highest conviction I have ever had about any investment I have ever made, full stop,” Ackman said in an interview with Bloomberg Television. “This is all-hands-on, and I have everyone in the entire organization working on this project, including two of the top law firms in the country.”
Ackman brought an associate and his firm’s chief attorney to give parts of the presentation, which included more than 340 slides and lasted more than three hours, including a question-and-answer period.
Ackman declined to allow Herbalife to participate in today’s conference, Barb Henderson, an Herbalife spokeswoman, said in an e-mailed statement during the presentation.
“Had our executives been there, they would have been able to tear Mr. Ackman’s premises and interpretation of our business model apart,” Henderson said. “His misstatements and mistakes are too numerous to address immediately.”
Ackman said he fears for his safety after Herbalife Chief Executive Officer Michael O. Johnson told CNBC yesterday that the U.S. would be better when Ackman is gone. Ackman said the comments were unusual for the CEO of a large, publicly traded company. Johnson made the comment after Ackman had told CNBC the U.S. would be better off without Herbalife.
Pershing Square turned over research to the U.S. Federal Trade Commission and will be available to investigators, Ackman said in the interview.
Ackman said he chose his timing carefully to get maximum attention before Herbalife distributors are required to purchase new product in January to qualify for certain commissions.
Pershing Square is short more than 20 million shares, Ackman also disclosed, which is about 97 percent of the 20.7 million short interest shares outstanding today, according to data compiled by Bloomberg. He will donate any proceeds from the position to charity.
“A lot of people have been harmed here,” Ackman said in the interview. “We don’t want to be making money while other people have been harmed.”
Linda Bolton Weiser, an analyst with B. Riley & Co. in New York, said Ackman’s presentation was “light.”
“The product is sold to people, people do use it,” said Bolton Weiser, who also is an Herbalife distributor. “He included very little of that aspect.”
Bolton Weiser said she buys for herself only and that being a distributor helps with access to company information. She also is an Avon sales representative, she said.
“His claim is that nobody is buying it at all,” Bolton Weiser said, disputing Ackman’s assertion. “He literally said at one point there’s almost no retail sales going on. That’s a very odd statement to make.”
Yesterday, Herbalife urged the U.S. Securities and Exchange Commission to investigate Ackman’s announcement because certain Herbalife put options expire tomorrow, a day after the Sohn conference, the company said. Pershing Square doesn’t own options in Herbalife, Ackman said today at the conference.
“The allegation that Herbalife is a pyramid scheme is bogus,” Johnson said in an e-mailed statement yesterday. He has declined interviews today.
Short-selling refers to the practice of borrowing shares and selling them, with the goal of profiting by repurchasing them later at a lower price. A pyramid scheme is a scam in which people pay money or buy goods, typically not a genuine product, for the chance to earn profits when others join the scheme, according to the SEC.
Ackman joins Greenlight Capital Re Ltd. Chairman David Einhorn in raising questions about Herbalife. Einhorn asked executives on a May 1 conference call why Herbalife had stopped disclosing a breakdown of three groups of distributors in filings that it had previously provided. The questions sent the shares down 20 percent that day and led to a three-day plunge. Einhorn hasn’t spoken publicly about the company since.
The SEC subsequently questioned Herbalife, asking why executives viewed certain disclosures related to its distributors as immaterial to investors, according to a letter dated June 5 that was released Aug. 8 in a filing. On July 11, the SEC said it had completed its review following an explanation from Herbalife, an additional correspondence shows.
Herbalife sells vitamins, shake mixes and skin gels through a marketing network of independent distributors in 81 countries. Those independent contractors earn revenue by selling products directly to customers and recruiting new distributors, for which they earn a share of those sales and incentives from the company.