Herbalife Director Dunn Says Ackman Throwing Rocks

Herbalife Ltd. Director Jeff Dunn said hedge fund manager Bill Ackman is wrong in his analysis that the company is a pyramid scheme and is just “throwing rocks” to support his short position in the shares.

“I wouldn’t be here if I had any questions about it,” Dunn, chief executive officer of Wm. Bolthouse Farms Inc. and a former Coca-Cola Co. president, said yesterday in a telephone interview. “From a direct-selling standpoint, this company is a gold standard.”

Since joining the board of Cayman Islands-based Herbalife in November 2009, Dunn, 55, said he has seen nothing that validates Ackman’s concerns. Dunn said he met extensively with Chief Executive Officer Michael Johnson and researched the company before accepting the board seat.

Ackman, founder of Pershing Square Capital Management LP, touched off a hedge fund showdown in December by accusing Herbalife of using inflated pricing, misleading sales data and complicated incentives to hide a pyramid scheme. Carl Icahn, chairman of Icahn Enterprises LP, has defended Herbalife and taken a 13.6 percent stake. Dunn is the first director other than Johnson to publicly speak about the allegations, which the company denies.

“You certainly have short sellers and other people out there banging their drum, but they don’t have what I’d call pure objectivity,” Dunn said. “They are trying to support their own assertions. There doesn’t seem to be a lot of data that supports it. It’s more about throwing rocks.”

Herbalife fell 0.8 percent to $40.74 at the close in New York. The shares have gained 24 percent this year, while the Standard & Poor’s 500 Index advanced 8 percent.

Coca-Cola Executive

Dunn’s day job is running vegetable-juice maker Bolthouse Farms, which Madison Dearborn Partners LLC sold to Campbell Soup Co. in August. He spent 22 years at Coca-Cola before resigning as president and chief operating officer of its North America unit in 2003 during a management shakeup after sales slowed.

Dunn defended Herbalife’s direct-selling model, in which customers proselytize on behalf of products such as meal-replacement shakes and bars, aloe drinks and skin creams.

“That high-touch selling is really a part of the future of building brands and businesses around the world,” Dunn said.

The method has come under fire several times in Herbalife’s 32-year history. In May, Greenlight Capital Inc.’s David Einhorn sent Herbalife plummeting after raising questions on a company conference call about disclosures related to its 3.2 million independent distributors. Einhorn has said he has closed his short position in Herbalife.

Urging Investigations

Ackman predicts regulators, including the U.S. Federal Trade Commission and the Securities and Exchange Commission, will feel compelled to investigate Herbalife’s business model. Ackman sold short 20 million shares of Herbalife stock, betting regulators would shut the company, distributors would flee or it would collapse on its own.

“Most of his assertions and his analysis of the marketing plan and questions around that are just wrong,” Dunn said. “His findings are wrong. They looked at the financials wrongly.”

Ackman said today in an interview that the company still hasn’t answered any of the 284 questions he posed in a 40-page treatise last month.

“If I were an independent director on this board, I would make sure the independent directors had separate counsel to assess the validity of the allegations we’ve levied against this company,” he said.

‘Not Aware’

Dunn declined to say whether any investigation is under way. Regulators aren’t saying either. Herbalife President Des Walsh said in a Feb. 27 interview in Los Angeles that the company is “not aware of any regulatory action planned by the FTC -- any investigation of any kind.”

Walsh also said distributors haven’t fled or sales declined in the wake of what he called Ackman’s “flawed” strategy to profit on his short position on the stock. Herbalife is nonetheless using the recent criticism to look for ways to improve company disclosures and methods, Walsh and Dunn said.

“We take anybody’s questions seriously,” Dunn said. “We are constantly assessing our own relationship to the company as a board and making sure we have as much transparency as possible into the business practices, as well as the products and the financials of the company.”

Icahn Directors

Dunn and fellow Herbalife directors, including Stone Tower Capital LLC co-founder Michael Levitt and former Lifetime Entertainment Services LLC Chief Executive Officer Carole Black, have nominated two members of Icahn’s inner circle to join them. Jonathan Christodoro and Keith Cozza will stand for election April 25 after the company allowed Icahn to boost his stake to as much as 25 percent. Christodoro, 36, is managing director at Icahn Capital LP, and Cozza, 34, is chief financial officer at Icahn Associates Holding LLC.

Icahn said when he disclosed his investment on Feb. 14 that he would seek talks with the company about strategic alternatives, including taking it private. Walsh said in the interview last week that the company would “certainly” consider going private in a buyout “in the right circumstances.”

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