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.”

Herbalife is ‘pyramid scheme’: Pershing Square’s Ackman

LOS ANGELES — Hedge fund manager Bill Ackman, best known for taking big positions in stocks in hopes of pushing for management changes, is taking on weight management Herbalife Ltd. as his big end-of-the-year short.

A day after confirming that his $11 billion Pershing Square Capital Management is betting against the company, the manager outlined his case for shorting Herbalife shares in a presentation entitled, “How to be a millionaire.”

During a talk on Thursday before an audience of 500 at an event sponsored by a charitable group, Ackman said Herbalife is a “pyramid scheme” that has “grown remarkably rapidly” without demonstrating “much substance” to justify the growth.

He criticized the company for inflating the suggested retail price of its products and overstating its retail sales in public filings.

Shares of Herbalife, which tumbled 12 percent Wednesday after Ackman confirmed his hedge fund was shorting the stock, fell another 6.4 percent to $34.94 on Thursday morning on the New York Stock Exchange.

On Wednesday, Herbalife CEO Michael Johnson said Ackman’s charge about being a pyramid scheme was “bogus,” and he criticized Ackman for using a public attack on his company to benefit his “business model.”