Herbalife Prospering Despite Legal Attacks

Pyramid scheme accusations threaten nutritional supplements company
By Heide B. Malhotra, Epoch Times

Despite multiple accusations of running a pyramid scheme, Herbalife Ltd., reported in its first quarter 2013 earnings release, Apr. 29, a 17 percent increase in sales over the same period in 2012 and announced a dividend of $0.30 per share, payable on May 28. 

Bill Ackman, hedge fund manager and founder of Pershing Square Capital Management, has accused Herbalife of running a pyramid scheme, with supporting documentation published on the Fact About Herbalife website. 

Ackman began his attack on Herbalife with a detailed presentation at a Sohn Conference Foundation event Dec. 20, 2012, which concludes with the accusation of Herbalife being a pyramid scheme that has hurt “the most vulnerable communities in the U.S. and around the world.” 

“Pershing Square believes Herbalife is a pyramid scheme because, among other reasons, distributors earn more than 10 times as much from recruitment as they do by selling the company’s overpriced products to bona fide retail customers,” said Ackman in his presentation. 

Herbalife Ltd., is a global nutrition company that sells its products through a multilevel marketing (MLM) business model utilizing independent distributors in more than 75 countries. Its products are said to help people improve their nutritional intake, develop healthy skin, and lose weight. 

On Dec. 20, Herbalife responded to Ackman’s presentation with a press release, calling it “a malicious attack on Herbalife’s business model based largely on outdated, distorted, and inaccurate information.” 

Ackman is a noted short seller of Herbalife’s stock, which means he stands to profit from a decline in the share price.

 

Facing Continued Confrontation

 

In 2012, the Commercial Court in Brussels, Belgium, ruled that Herbalife runs a pyramid scheme in violation of the act governing such schemes. It reasoned that this company pays for bringing in distributors instead for selling its products. The company was fined $6,467 (5,000 euros) for each violation up to a total of 250,000 euros.

 On April 8, attorneys for Dana Bostick of California and on behalf of others filed a class action complaint against Herbalife in the United States District Court Central District of California, accusing the company of running an illegal pyramid scheme.

The above “real numbers are in direct contrast to the deceptive earning claims referenced in Herbalife’s promotional materials, including videos on Herbalife’s website, YouTube, and Herbalife distributor’s websites,” states the complaint.

 On April 29, Pyramid Scheme Alert (PSA), an international association, sent a detailed open letter of protest to the Direct Selling Association (DSA) in Washington, D.C., for its defense of Herbalife. It asked that DSA justify its support of Herbalife and explain its statement that a “large number of people” live off their earnings from that company.

 

Stock Market Reaction

 

Herbalife’s stock (NYSE: HLF) initially reacted to Ackman’s accusations by dropping from $33.70 on Dec. 20, 2012, to $27.27 the next day—a 19 percent plunge. 

However, the company’s stock has largely had a reversal of fortune this year, thanks at least in part to support from two of Ackman’s fellow billionaires, Daniel Loeb of Third Point Partners and activist-investor Carl Icahn, both of whom have taken the opposite position from Ackman and made considerable bets in favor of the company. 

So far in 2013, Herbalife’s stock is up 45 percent, or $14.71, as of close of trading May 24. It is rumored that a group of investors may be accumulating shares with the intention taking the company private again. 

Despite rumors and the recovery of Herbalife’s stock, experts concerning such accusations suggest that since Ackman was quite detailed and convincing in his accusations, the future for Herbalife is still uncertain.

 

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