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Bill Ackman Says He Can Prove Herbalife Is Pyramid Scheme

Herbalife Sales reps must purchase the product up front. If they cannot sell it, they eat it.

BILL ACKMAN screen shot

Billionaire investor activist Bill Ackman is continuing his fight against Herbalife, a company against which he has made a $1 billion bet to fail. According to the NY Post, Bill Ackman intends to unveil next week the results of a two year long investigation conducted by his Pershing Square hedge fund into Herbalife nutrition clubs.

In May 2012, Pershing Square Capital Management took a $1 billion short position on Herbalife.

Mr. Ackman firmly believes that the Los Angeles based company, which is currently under investigation by both Federal and state prosecutors and regulators, is nothing but a pyramid scheme. He maintains that his firm’s findings will prove Herbalife’s nutrition clubs guilty of perpetuating a fraud.

Multi leveled marketing companies such as Herbalife rely on sales representatives who are in business for themselves. These salespeople must purchase the product in advance and are encouraged to bring new salespeople into the company. Each sales rep in turn collects a commission on all the sales made by the people they bring in, while the people above them get percentages of their sales.

Sales reps must purchase the product up front. If they cannot sell it, they eat it.

In Herbalife’s case, the company uses its nutrition clubs, first begun in Mexico, to introduce potential marketers to the line of products. There are currently 3, 000 of these clubs in the New York area alone.

The NY Post cites Brad Harris, a former hydraulic mechanic who runs several nutrition clubs, as having told prospective recruits that, “People are going to see this and want to duplicate this and that’s when you start making royalties, which is the exciting part of our business. We can actually build a distributorship by doing what we’re doing here.”

Herbalife’s critics, such as the outspoken Ackman, say the clubs are just a tool for perpetuating a pyramid scheme. Mr. Ackman has called them a “pyramid within a pyramid.”

In April, Herbalife accused Ackman of paying people to make false accusations against it.

Mr. Ackman, who has an estimated net worth of $1 billion, has gone on record that he would donate any profits from the Herbalife deal to charity. He denies that he is engaging in “day trading” with the stock and asserts that he is in it for the long term.

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