By Svea Herbst-Bayliss
BOSTON, March 11 Billionaire investor William
Ackman renewed his attack on Herbalife on Tuesday, saying he has
evidence showing the nutrition and weight loss company is
breaking direct-selling laws in China, its fastest growing
The company said it follows local laws, and Chinese
regulators have yet to comment on the matter.
Ackman, who has placed a $1 billion short bet against
Herbalife, said the company is breaking the law in China by
making recruits pay an entry fee and by letting distributors
recruit new members. He also said the company is disguising its
sales to distributors as hourly consulting fees.
He made the claim on a conference call that lasted more
than two hours and drew some 300 listeners.
He was joined on the call by one of his lawyers, David
Klafter, and Aaron Smith-Levin, whose OTG research firm
conducted interviews with Herbalife distributors in China, and
Ben Hakim, one of his partners.
"My understanding of the facts and law in China is yes, they
are violating both civil and criminal law" in China, Klafter, a
senior counsel at Ackman's hedge fund Pershing Square Capital
Management, said on the conference call.
Ackman and his team said this presentation is a first step
toward bringing Pershing Square's concerns to the attention of
Herbalife said sales in China rose more than 120 percent in
the fourth quarter of 2013, the fastest of any region worldwide,
contributing about 10 percent to global sales last year. The
company has 200,000 sales representatives in the country and
uses a "unique marketing program" to meet Chinese regulations,
it said in its latest annual report.
Herbalife has said it remains confident in its business in
China and said it is in compliance with local laws.
Direct sales models have recently come under fire in China.
Authorities launched a probe into Herbalife rival NU Skin
Enterprises Inc in January after state media published
reports that it brainwashed its members. Shares of NU Skin,
Herbalife and rival USANA Health Sciences Inc fell on
news of the probe.
Ackman has accused Herbalife of running a pyramid scheme in
which members make more money recruiting new members than
selling the actual product. He made that claim public in
December 2012 when he unveiled a $1 billion short position in
the company's shares. So far he has lost money on the bet as
rivals such as Carl Icahn took the other side.
The company says its business is not a pyramid scheme.
Despite the paper losses, Ackman said he is sticking by his
bet, showing no fatigue on the conference call where he answered
wide ranging questions from listeners. In the 14 months since
making his short bet public, Ackman said he has found fresh
evidence nearly daily that is convincing him to stick by his
original bet. If Herbalife ceased to exist right now he would
make a few billion dollars, he said.
But there is no sign yet that Herbalife is near collapse,
particularly since no regulator has yet commented publicly about
its intentions in spite of heavy lobbying from Ackman.
Ackman also suffered another blow on Tuesday when lawmakers
agreed on a broad outline to replace mortgage lenders Fannie Mae
and Freddie Mac in which Ackman owns common shares and likely
suffered hundreds of millions in losses. Recent sharp gains in
those stocks helped Ackman's fund return roughly 12 percent this
year, far better than the average hedge fund's 1.4 percent gain
On Herbalife, he acknowledged that there is investment risk
if regulators do nothing, a factor that he cannot control.
Many on the conference call asked why there are virtually no
public stories about people who have lost their life savings on
investments in Herbalife.
Ackman said civil rights groups have identified over 1,000
victims and that this firm has found roughly 200 victims. But he
said many victims are reluctant to go public because they do not
realize they have been cheated or are embarrassed about it. Also
"a lot of Latino victims are undocumented and the last thing
they will do is complain to the government," Ackman said.
Fresh media attention, including a front page article in the
New York Times on Monday, should help galvanize regulators into
reviewing the matter, he said.
Herbalife's share price closed down 1.16 percent at $65.39.