Ackman Renews Herbalife Pyramid Claim in 40-Page Treatise

Hedge fund manager Bill Ackman renewed his claim that Herbalife Ltd. is a pyramid scheme in a detailed 40-page treatise questioning everything from the company’s sales accounting to claims that it makes millionaires.

Ackman, whose Pershing Square Capital Management LP has sold short 20 million shares of the nutrition-products company, planned to post the document today on his website, Ackman also questioned new disclosures by Herbalife yesterday that detail distributor compensation.

“Herbalife executives have repeatedly committed to having a fact-based conversation and total transparency about Herbalife’s business,” Ackman said in the document. “Pershing Square would welcome responses to the following questions.”

Ackman has put Herbalife on the defensive since December, when he said the company uses inflated pricing, misleading sales information and a complicated incentive plan to hide a pyramid scheme. He has urged U.S. regulators to investigate the company. Herbalife has denied his claims, saying it’s retail-oriented and sells products with unique ingredients.

“Herbalife is a financially strong and successful global nutrition company, having created meaningful value for shareholders, significant opportunities for distributors and positively impacted the lives and health of consumers since our founding in 1980,” Barb Henderson, a spokeswoman, said in an e-mail. “Pershing Square’s latest tome is motivated by a reckless $1 billion short bet.”

Einhorn Questions

Prior to Ackman, Greenlight Capital LP’s David Einhorn sent Herbalife shares plummeting after he raised questions on a company conference call about its disclosures. Einhorn doesn’t now hold a position in Herbalife, he said today in an interview on Bloomberg Television.

“When you look at the range of outcomes, it’s so wide that it’s not clear to me that I want to be long or that I want be short,” Einhorn said.

Ackman’s sweeping document questions Herbalife’s adherence to a 1986 court settlement in California over its business practices, the validity of an Herbalife study evaluating consumption of its products and the company’s financial statements.

Herbalife rose 0.4 percent to $35.92 at the close in New York. The stock closed at $42.50 on Dec. 18, the day before Ackman revealed that he had shorted the shares.

U.S. regulators at the Federal Trade Commission and the Securities and Exchange Commission have declined to say whether they are investigating Herbalife or intend to do so.

‘Becoming Immune’

“The market has voted with an excess of buy orders as to the invalidity of Ackman’s inquiries,” Robert Chapman, whose Chapman Capital LLC is long Herbalife, said in response to Ackman’s release. “Like with a virus, Herbalife stock is becoming immune to Ackman’s bad medicine.”

At the heart of the dispute between Ackman and Herbalife is whether most of Herbalife’s sales come from retail consumption or recruiting efforts. Ackman said sales are mostly to other distributors, which the FTC has said would be a red flag for a pyramid scheme.

Herbalife posted a new disclosure on its website yesterday that said 73 percent of its distributors join to get a wholesale price on product consumed by them or their families. In addition, more than 434,000 distributors, or 88 percent of the total, received no incentive or commission payments from Herbalife last year.

The top 17 percent of distributors earned an average of $4,485 in Herbalife payments, not including expenses or money earned from sales of product to others. The payments for those distributors ranged from an average of $724,030 for the top 194 to nothing for the bottom 25,193 participants.

In his new document, Ackman said the new disclosure “confirms the material inadequacy of previous” compensation statements and asks if the company feels compelled to “refund loses of those distributors who were misled.”

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