Published On: Tue, Jul 8th, 2014

New Allegations of Extravagant Claims May Bolster Bill Ackman’s Case Against Herbalife

Ackman ... [will] continue to short Herbalife "to the end of the Earth."

 

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As investigations continue to determine whether or not Herbalife’s multi-level marketing business model is legitimate, new complaints are surfacing on extravagant claims made by Herbalife representatives, and critics of the company consider the operations of Herbalife nothing more than a “confidence game.”

Among Herbalife’s most outspoken critics is Bill Ackman, manager of Pershing  Square Capital Management. He has charged the company with corrupt business practices and with making extravagant claims. Herbalife  has already dealt to some degree with the issue of false claims about the health benefits of its products. In April, ABC News ran a video recording of an Herbalife distributor saying its products could cure brain tumors. In response, the company disciplined around 600 representatives for making similar assertions about the efficacy of the products to treat diabetes, cancer and heart disease, and some distributors were dismissed.

The newest allegations involve complaints over the amount of money distributors said  sales representatives could expect to make.  Seekingalpha.com author Quoth the Raven discusses the case of Russell Gain, who started a website “60 Minute Money” as a covert  strategy to recruit Herbalife distributors with promises of “foolproof” methods of making money. Gain claimed that those who followed his “proven” system would make $5, 000 a month full-time and $2, 500 part time. According to Pershing Square’s website, Gain wrote that he “developed a multi-million dollar business now generating sales at an annualized rate of over $5 million all from my home” and that “[p]eople from all over the world now participate in [the 60 Minute Money] program and are building similar businesses for themselves from their home.” Pershing  Square also argues that Gain targeted lower income and the unemployed, taking advantage of their desperate circumstances to manipulate them with impossible claims of generating wealth.

Last year, as reported by Jewish Business News, Bill Ackman made a $1 billion “bet” against Herbalife, accusing it of adopting a pyramid scheme and, prior to this “bet” and call on federal and state investigations of the company, had a large short position on the stock. To counter claims that Ackman wanted to go after Herbalife to prop up his short position, he has stated that the profits from his investment will be donated to charity.

There was controversy in April concerning an ABC News report  that Bill Ackman offered a former Herbalife representative, $3.6 million over a ten year period if he would lose his job by giving negative information about Herbalife to investigators. Ackman said that such a deal was made, but added, that this was the right thing to do, given that this man would lose his wages at Herbalife.

Herbalife is a multi-level marketing company that requires its distributors to purchase the products, and gives a commission on sales made to new sales representatives recruited.  Critics of this scheme point out the pressure placed on recruiting as many new people as possible, and some say few people aside from sales reps actually buy the products; thus, it is not a real business, but simply, a self-perpetuating pyramid scheme. In addition, those recruited in the later stages have little opportunity to make a percentage on sales of new recruits as the market becomes saturated, and therefore, the opportunities for newcomers dwindle as the number of recruiters  grow.

Herbalife argues that is products have inherent value and that it is a legitimate multi-level marketing business. In spite of its legal battle, the company beat first quarter earnings estimates on April 28th by 21 cents and surpassed revenue estimates by $30 million. Perry Capital increased its stake in the company from 3 million to 4.8 million shares for a 4.9% stake in the Herbalife. Investors long and short the stock seem to be involved in a tug of war, and more conservative investors are likely to avoid jumping into the battle. In spite of the fact that, as of April, Pershing Square’s longstanding short position had lost money, Ackman told Bloomberg would continue to short Herbalife “to the end of the Earth.”  However, in spite of the challenges posed by Herbalife, Bill Ackman’s Pershing Square has seen a  26.4% return  so far in 2014.

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