Herbalife fights pyramid charge with distributor data

NEW YORK, Thu Feb 7, 2013 — Herbalife Inc. disclosed more information on Wednesday about how much its U.S. distributors earn, looking to provide more clarity as it defends its business model from critics like billionaire hedge fund manager Bill Ackman.

The greater detail about 2012 distributor compensation follows sustained criticism by Ackman, who has a $1 billion bet against the company and alleges that its direct-selling model is nothing more than a “well-managed pyramid scheme.”

Ackman’s arguments include assertions that Herbalife’s disclosure on average compensation is “materially deceptive” and that Herbalife distributors “experience an abnormally high failure rate.” Wednesday’s enhanced disclosure is intended to address those concerns.

Specifically, Herbalife says that 88 percent of its distributors received no payments in 2012, including 71 percent who did not recruit any other distributors. The remainder potentially recruited other distributors but did not make money because their recruits did not sell enough product.

Herbalife said that on average, 73 percent of its “distributors” join Herbalife just to get a discount on the products rather than to earn money.

That goes “a fair ways down the road to change the math for Ackman,” said D.A. Davidson analyst Timothy Ramey. “Ackman kept including these people in the denominator, representing them as failed businesses. They’re not failed businesses.”

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