Ackman launches broadside over Herbalife member earnings

NEW YORK Wed Feb 12, 2014 10:16am EST

The Herbalife logo is seen on a building housing some of their offices in downtown Los Angeles, California April 28, 2013. Herbalife will report their earnings on April 29. REUTERS/Lucy Nicholson

The Herbalife logo is seen on a building housing some of their offices in downtown Los Angeles, California April 28, 2013. Herbalife will report their earnings on April 29.

Credit: Reuters/Lucy Nicholson

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NEW YORK (Reuters) - Billionaire investor William Ackman has claimed the vast majority of Americans who work as distributors for Herbalife earn nothing at all from the nutrition and weight loss company.

Ackman has accused Herbalife of running a pyramid scheme that focuses more on convincing new distributors to buy bulk shipments than it does on selling to retail customers, leaving some recruits in financial ruins.

And he has made a $1 billion bet its share price will fall to zero under regulatory scrutiny.

The company has vehemently denied running a pyramid scheme.

"In reality, only three-hundredths of one percent of Herbalife distributors in the U.S. earn $250,000 per year in payments from Herbalife, while 88 percent of U.S. distributors earn $0 per year in payments from Herbalife," Ackman told Reuters on Tuesday about research his firm prepared on distributor payments.

Ackman's $12 billion Pershing Square Capital Management has researched the matter with the help of former distributors and company documents they have provided.

"Herbalife does not pay to recruit - all payments are related to the sale of products," a Herbalife spokeswoman told Reuters on Tuesday in response Ackman's latest claim.

"Herbalife distributors and members are made aware that results depend on time, energy and dedication, and success comes with hard work."

Ackman is making the information public for the first time now even though it has been featured in conversations that Ackman and his team have had with state and federal law enforcement officials and regulators for some time, a person familiar with those discussions said.

Last month, Senator Edward Markey, a Massachusetts Democrat, urged the Securities and Exchange Commission to investigate the company.

Civil rights group League of United Latin American Citizens has appealed to the Attorney General in California to investigate.

The SEC and state Attorneys General in California and New York have declined to comment on whether they are investigating the company.

The research, seen by Reuters, is expected to be published shortly on the website, www.herbalifepyramidscheme.com, where Ackman has posted other evidence to back up his claims against the company.

GOING SHORT

Its findings stand in stark contrast to testimonials from top Herbalife distributors, who often tout their lavish lifestyles, featuring fancy cars and large homes, as an incentive to get new distributors to sign up.

Ackman's new research mentions Leslie Stanford, one of Herbalife's top distributors and a company director from 2002 to 2005, and her claims that anyone can earn a lot of money.

"Your total for the year is $120,000 if you have three generations of supervisors who have duplicated each other doing 2,500 volume points per month, OK? Is that realistic? It is absolutely realistic," Stanford says in a training video that was copyrighted in 2001, according to Ackman's research.

She owns Success Connection, a business that sells training videos, with John Tartol, a current Herbalife board member, according to incorporation records originally filed in 2001 in Colorado.

The partners recorded and hosted training calls on the Success Connection website as recently as August, 2013, according to Pershing Square's research.

Stanford, who owns Health Q Club in Greenwood Village, Colorado, and is described on the club's website as one of the world's top 10 Herbalife distributors, did not reply to repeated email and telephone requests for comment from Reuters this week.

Ackman announced his short bet against Herbalife in December 2012, and some of his rivals, including Carl Icahn, have lined up against him.

While his bet posted paper losses amounting to hundreds of millions of dollars as the stock price climbed 87 percent last year, the losses have shrunk as Herbalife's shares have fallen 16 percent since the start of 2014.

(Reporting by Svea Herbst-Bayliss; Editing by Richard Valdmanis and Sophie Hares)

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