Herbalife attacks pyramid claim

But fund manager holds firm in criticizing business model

Associated PressJanuary 10, 2013 

— Herbalife came out swinging Thursday against claims by hedge fund manager William Ackman that the business amounts to a pyramid scheme.

But Ackman didn’t back down, saying in a statement that Herbalife “distorted, mischaracterized, and outright ignored large portions” of Pershing Square Capital Management’s December presentation.

A series of Herbalife executives looked to refute Ackman’s allegations during an analyst and investor meeting earlier in the day, laying out everything from how the business operates to who its customers are.

Last month, Herbalife announced plans to build a $130 million plant at a defunct Dell site near Winston-Salem, where it said it will hire 500 workers. The company received $1 million worth of state incentives upfront, and could receive up to $5.5 million more in state tax breaks and $3.4 million in local incentives if it meets targets.

Critics have questioned the company’s business model, which uses a network of distributors to sell its nutritional supplements and weight-loss products in more than 80 countries.

The defense put forth Thursday comes a few weeks after Ackman alleged Herbalife Ltd. was a pyramid scheme and that he was shorting the stock. Short-sellers profit when a share’s value declines.

Under a pyramid scheme, a company makes most of its money by recruiting new salespeople, rather than on the products that they sell. Aside from Ackman, Greenlight Capital’s David Einhorn had also raised concerns about Herbalife’s business in May.

Herbalife President Desmond Walsh said Thursday that over its 32-year history, only one court has ruled that the company runs an illegal pyramid scheme. The ruling, which occurred in Belgium, is being appealed.

Walsh said that ruling has not hurt Herbalife’s business in the country. He also balked at Ackman’s claims that Herbalife uses a “pop-and-drop” approach to the markets it serves – entering a market, making money as fast as it can and then pulling out and moving on to new markets. Walsh said this is not true and that much of Herbalife’s growth is coming from markets it has served for more than 10 years.

Herbalife Chief Operating Officer Richard Goudis looked to debunk Ackman’s claim that Herbalife is not a product company. The executive said that Herbalife invested $44 million into research and development, technical infrastructure and other areas to support its products last year.

To dispel Ackman’s claims, Herbalife hired Lieberman Research to study its customers. A representative of the firm said that two of the studies, which were conducted among a sample of 2,000 adults over the age of 18, found that more than 5 million households purchased Herbalife products in the past three months.

Herbalife, which is incorporated in the Cayman Islands and based in Los Angeles, also maintained that it complies with federal requirements.

Ackman said Thursday that Pershing will respond to every issue Herbalife raised during its analyst and investor meeting, but did not disclose when its next presentation would be.

Herbalife’s stock hit a low of $24.24 in late December as a result of Ackman’s allegations, its lowest point since July 2010. Shares have lost close to half their value since the end of April.

The company’s stock closed at $39.24 Thursday, down 71 cents. Charlotte Observer staff writer Ely Portillo contributed to this report.

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