HERBALIFE: Sophisticated Pyramid Scheme?

Herbalife HLF

Bill Ackman, CEO and founder of Pershing Square Capital Management, has made it his crusade to let the world know about what he believes to be a major pyramid scheme. It started in mid December when Ackman announced his findings in a slideshow presentation, sending Herbalife (HLF) stock plummeting. He hasn’t stopped with a single press release, rather continuing to state that he’s just getting started and has enough information to back it up such that federal regulators will have to take notice.

Herbalife is a “multi-level” health marketing firm incorporated in the Cayman Islands but headquartered in Los Angeles. They sell a variety of nutritional supplements and skin care products through a network of independent distributors. Products transfer across levels of distributors, each taking a cut of profit until it is finally sold to a consumer.

In a recent Bloomberg interview, Ackman stated:

“We’re prepared to spend whatever it costs and do whatever is required to make sure that the world understands the facts about this company… The company’s so-called earnings statement is materially false and misleading and enables Herbalife to deceive new distributors about the potential profitability of the business opportunity.

We’ve done a lot of the work for the regulators,” Ackman said in a later e-mail. “We’ve provided the data and a legal road map for regulators to determine that it is a pyramid scheme.”

Herbalife HLF Stock Performance Bill Ackman December 2012

Ackman has taken a major short position on Herbalife, as Bloomberg reported:

Pershing has shorted more than 20 million shares of Herbalife stock. The most recent were executed just before Ackman’s December presentation… Pershing has not covered any of its short and there are no plans to get out now, Ackman also said.

Any money Ackman makes personally on the Herbalife short will be donated to charities run by Ira Sohn and a Pershing foundation, he said. Pershing investors stand to reap millions of dollars of profit on the short trade if Herbalife collapses or is shut down by regulators.

Herbalife is scheduled to respond to these allegations on Thursday, January 10. It will be interesting to hear analysts and company rep’s perspective in defending the firm’s legitimacy. Check back for updates as events unfold.


[Photo: ~ hoho q^0^p ~/Flickr]