Herbalife Clean Audit Won’t Deter Ackman in Pyramid Claim

Hedge fund manager Bill Ackman, who’s already lost as much as $500 million betting against Herbalife Ltd., is sticking to his case that the company is an illegal pyramid scheme after it said a re-audit found no material changes.

Herbalife, a maker of vitamins and meal-replacement shakes, said in a statement yesterday that PricewaterhouseCoopers LLP completed a review of the fiscal years ended Dec. 31 in 2010, 2011 and 2012, and the company is now up to date on its filings with the U.S. Securities and Exchange Commission.

Ackman, whose Pershing Square Capital Management LP initially sold short at least 20 million Herbalife shares, has lost money on the bet as the stock more than doubled this year and investors, including billionaire Carl Icahn, have backed Herbalife. The company has consistently denied Ackman’s claims.

“It is not the role of Herbalife’s auditor to determine if the company is a pyramid scheme,” Pershing Square said in a statement yesterday. “Rather, that determination depends on whether distributors earn more from recruiting new distributors than from retail sales to consumers who are not distributors.”

“Remember, Enron also had audited financial statements,” Ackman also said in an e-mail, almost a month after saying he’d take his bet against Herbalife “to the end of the earth.” Herbalife declined to respond to an e-mail seeking comment on the Enron statement.

Shares Rise

The shares rose 1.2 percent to $75.76 at the close in New York.

“We are very happy, but I don’t think it was unexpected,” Icahn said yesterday in an interview about the results of the audit. “It is a good company, it is still undervalued, it’s a growth company which gives work to a lot of people and what Ackman says is nonsense.”

Ackman said in November that the company was taking too long to produce the re-audits, adding that a failure to meet a self-imposed December deadline would make it hard to borrow money. In August, Ackman sent a 52-page letter urging the auditor to pay attention to “serious accounting and disclosure issues.”

“He couldn’t be any further from the truth,” Chief Financial Officer John DeSimone said yesterday in a telephone interview, referring to Ackman. “His thesis is wrong, his facts are wrong. It’s now a propaganda campaign.”

Shareholder Equity

The nutrition company hired PricewaterhouseCoopers in May after its previous accounting firm, KPMG LLP, resigned because of alleged insider trading by an auditor.

While saying there were no material changes, Herbalife did disclose several “errors” to its prior reports, according to filings. Shareholder equity as of Dec. 31 2012 was revised to $395.5 million from $420.8 million, and changed to $317.7 million from $342.9 million for quarter ended March 31, 2013. Other revisions included a 2.8 percent decline in net income for 2012 to $464 million from a previously reported $477.2 million.

Herbalife executives said in October they would evaluate a 2014 share repurchase plan once the re-audits were completed and more options were available. They also left open the possibility of a capital restructuring, such as a tender offer. A decision hasn’t been made, DeSimone said yesterday.

Icahn, who bought Herbalife shares after Ackman made his accusations, is the company’s largest individual investor, with a 16.8 percent stake, according to data compiled by Bloomberg.

Belgian Ruling

Earlier this month, Grand Cayman-based Herbalife won a Belgian appeals court ruling rejecting claims the company is a pyramid scheme, and concluding that income its distributors earn from others recruited to buy or sell its products isn’t a violation of European consumer protection laws.

In September, Bill Stiritz, chief executive officer of Raisin Bran maker Post Holdings Inc., said he had bought Herbalife shares and was researching the company. He is now Herbalife’s fourth-largest shareholder with a 6.4 percent stake. Stiritz has said he’s willing to take part in a leveraged buyout of the company.

Herbalife sells vitamins, shake mixes and skin gels through a marketing network of independent distributors in at least 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. In October, Herbalife posted third-quarter profit that beat analysts’ estimates as sales gained in the Americas.

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