Bill Ackman Slams Herbalife's Nutrition Clubs: 'It's a Pyramid Scheme'

Herbalife Plunges As Ackman Vows To Unveil Enron-Like Fraud
Jin Lee/Bloomberg via Getty Images William "Bill" Ackman, founder and chief executive officer of Pershing Square Capital Management.
By KEN SWEET

NEW YORK -- Activist investor Bill Ackman fired his latest salvo at the weight loss and nutritional supplements company Herbalife (HLF) on Tuesday, alleging that one of the business models used by its distributors is evidence that the company operates as an illegal pyramid scheme.

Ackman's presentation focused Herbalife's "nutrition clubs," private settings where Herbalife's distributors sell the company's products like weight-loss shakes and also recruit others to sell Herbalife's products.

In a three-hour presentation, Ackman laid out a case that because Herbalife's nutrition clubs focus heavily on recruiting new members instead of selling products to consumers, the clubs are by definition functioning as a pyramid scheme.

Ackman, who runs Pershing Square Capital Management, an activist hedge fund, has bet heavily against Herbalife by using "short" trades that will be profitable if the value of the company's stock falls. Ackman has been trying to convince other investors to take similar positions, most memorably in a shouting match he got into with Carl Icahn, a rival investor, on live television in January 2013. Icahn has taken the opposite position from Ackman and has defended Herbalife.

The company has not been accused of any crime and insists that its operations are legal. The Securities and Exchange Commission, the Federal Trade Commission and the Attorneys General of New York and Illinois are investigating Herbalife, but no charges have been brought against the company since Ackman announced his short position in 2012.

Investors appeared to dismiss Ackman's latest allegations and sent the company's stock soaring. Herbalife ended the day up $13.75, or 25 percent, to $67.77. Trading volume was more than 15 times the daily average. The stock is still down 14 percent so far this year.

Nutrition clubs have become an increasingly lucrative business model for Herbalife in the last 10 years, with more than 4,000 operating in the U.S. alone, according to the company.

However, Ackman alleged that nutrition club attendees were not actually end consumers of the product. Instead nutrition club attendees were often recruits to become nutrition club operators of their own. These recruits should not be thought of as retail users of the product, but instead thought of as the next layer in the pyramid.

A pyramid scheme occurs when a company's primary mode of doing business is not selling a product or service to a consumer, but instead recruiting new participants to the company who in turn try to recruit new members. Pyramid schemes are illegal because they eventually collapse once there are no more people to recruit. They are similar to Ponzi schemes.

Herbalife has vigorously and repeatedly denied Ackman's arguments, and says it operates like a multilevel marketing company similar to Avon, Amway and Mary Kay.

"Once again, Bill Ackman has over-promised and under-delivered on his $1 billion bet against our company," Herbalife said in a statement.

Ackman bet $1 billion against Herbalife back in 2012, alleging that the company is a pyramid scheme and should be shut down by the government. Ackman said he spent $50 million of investors' money and two years investigating Herbalife.

Ackman argues he is in it for "the long haul" when it comes to Herbalife. He has also repeatedly said that any personal profits he would make from the collapse of Herbalife would be donated to charity.

At the end of his presentation in midtown Manhattan, Ackman appeared to tear up when discussing his campaign against the company. Ackman alleged that Herbalife's business model takes advantage of often poor people with minimal educations who are trying to find a way to start a business. Ackman called Herbalife CEO Michael Johnson "a predator."

"I hope he is listening," Ackman said.


The Herbalife Conundrum: The Curious Case of Bill Ackman

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Gina

I thought the founder of the company died from a toxic liver? They mentioned something about it when he first died and then everything was hushed after that. I used to take and sell Herbalife. I liked the products but I never asked anyone to become a distributor and work under me. I would have gotten portions of their sales if I had but I only paid the 50 dollars required (At that time) to sell the products so I could get them at a discount for myself. I looked and felt great when I was on Herbalife but you can't live on handfulls of supplements and shakes with one main meal a day! That's no way to live. I also used to sell Avon when I was 14. The woman who signed me up, lied to the company and said I was 16 so I could sell the product because she was getting money from each sale I made. I only sold enough to buy an Atari game system which was a big thing in 1980! After that, I quit selling because the only way to make big money is to get people to sell under you. So yes, these companies are like pyramids. The top guy makes all the money while the little guys go out and do the work, get more people signed up to sell more products and in turn they make some money as well but the top players make the most. I can't believe they're still in business after the founder died.

July 23 2014 at 1:25 PM Report abuse +1 rate up rate down Reply
misterr999

ever hear of Glenn Turner?...he invented MLM..was jailed fo fraud..same system..different product..(Kostco) cosmetics..these Herbal Life characters used to have late night infomercials on endlessly..in the 1970's..the only people that are sucessful are ones that work at a very big company and sell to their co workers..OR..who has a shop steward friend at a big plant to help sell stuff..thoise are the 'examples' they trot out to show it works..a 'normal' person is a patsy..

July 23 2014 at 12:32 PM Report abuse rate up rate down Reply
necropolis83666

Amway is even worse.

July 23 2014 at 12:28 PM Report abuse rate up rate down Reply
Kay

A couple years ago a friend invited me to a party and talk from Meleluca, (I think I spelled it right) and from what I could tell at that time it was similiar to Herbalife, a pyramid! The lady who gave the talk invited us to join her group, and of course spend money each and every month, and then we were to sell to others and try to get these people to join me, and on and on it went. Several people at this 'meeting' joined to sell but right now I think that maybe, just maybe, only one remains. One person that I know personally was purchasing items from them, the thing I remember most was the vitamins! Very expensive, way to expensive for me when I could get the same type of vitamins for much less! Plus to join, it was quite a large investment, which scared me away right away. They did have a couple items that I tried, but they also wanted me to spend a certain amount of money each month and since I was living alone, there was no way that I could use the prducts in that amount of time! I for one am glad that I avoided the entire situation.

July 23 2014 at 12:20 PM Report abuse rate up rate down Reply
barbdunn31

If this A-hole is successful in shutting down Herbalife then I'm suing him for the cost of food for the rest of my life. As a dealer, I only pay approximately $26 a month for two meals a day with Herbalife and have lost 63 pounds so far. My food budget is almost nil and this goes a long way to feeding me nutritiously. I'm 60 years old and this is the only thing that's worked for me. If he takes it away from me, there aren't enough bad things that can happen to him.

July 23 2014 at 11:40 AM Report abuse -1 rate up rate down Reply
1 reply to barbdunn31's comment
gerbersmail

How about closing your yap and stop stuffing food into your pie hole like it's your last meal. You sound like a pretty weak minded individual with no sense of self disipline. Eat right and exercise like the rest of us and you might see some results. At 60 years old one would think you would stop blaming others for your weaknesses.

July 23 2014 at 12:23 PM Report abuse -2 rate up rate down Reply
darkfree

Amway , citi bank, certain life insurance company's do the pyramid scheme to get
free labor.

July 23 2014 at 11:36 AM Report abuse rate up rate down Reply
mscasa

There are ripoffs. Amway too.

July 23 2014 at 11:21 AM Report abuse +1 rate up rate down Reply
tps364

The biggest public fraud?? Isn't that the Federal Reserve?

July 23 2014 at 11:16 AM Report abuse +1 rate up rate down Reply
1 reply to tps364's comment
accsport

Good call.

July 23 2014 at 1:17 PM Report abuse -1 rate up rate down Reply
Doc

It would appear Ackman is trying to influence the market to his advantage by shorting the stock and then publically trashing the company. Like Herbalife or not, it is a decent product but is a MLM business where the ones higher up and working the business longer and harder make more money. Ackman vs. Icahn = Billionaire catfight!

July 23 2014 at 11:12 AM Report abuse -1 rate up rate down Reply
bizplnr

Ackerman is an ass. I can't believe people are still investing in his company and that the SEC hasn't investigating him for attempting to manipulate the price of a security.

For those talking about multi level marketing. First any company that has managers above them that get paid for someone else's effort is in fact a multi-level marketing company. That pretty much covers all of corporate America and 50+% of small businesses. Second, most people aren't sales people or self motivated for the long haul. This is true of all people and the reason 75% of ALL businesses fail within three years, inclusive of MLM individuals. Lastly, the "sign-up" fee that most MLM companies charge, usually b/w $400 and $500, is pretty cheap versus starting up your own business and failing at an average minimum cost of $25,000. Success or failure depends on product, individual ability, willingness and desire to work your ass off and make sacrifices EVERY day. In business, dabblers die and persistency pays.

July 23 2014 at 11:09 AM Report abuse -1 rate up rate down Reply